Choosing the right way to borrow money can feel overwhelming. Whether you plan to fund home improvements, pay for a large purchase, or simplify your outgoings, understanding your options can save you time, stress, and money.
We will break down the differences between secured loans and personal loans to help you understand which features may be relevant to your situation.
Quick answer: what is the difference between a personal loan and a secured loan?
A personal loan is usually unsecured, meaning you do not use your home as security. A secured loan is secured against an asset, usually your home, and may allow larger borrowing amounts or lower interest rates. However, secured borrowing puts your home at risk if you do not keep up repayments, and borrowing over a longer term may increase the total amount you repay.
What is a secured loan?
A secured loan is a type of borrowing where you use an asset you own, usually your home, as security. Because this lowers the risk for the lender, secured loans may offer lower interest rates and larger borrowing amounts than unsecured options. However, borrowing over a longer term can increase the total amount you repay.
Think carefully before securing debt against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.
Specialist online lenders may offer different types of secured homeowner borrowing, depending on eligibility, affordability and product criteria:
- Selina Homeowner Loan: This is a secured loan where you borrow a set lump sum against your home equity. You get the money upfront and pay it back in fixed instalments over a set term, usually between 5 to 30 years. It is secured against your property, so your home may be at risk if you do not keep up repayments.
- Home Equity Line of Credit (HELOC): this is a flexible, revolving credit line secured against your home. You are approved for a specific borrowing limit and can draw down funds as needed during a 2 to 5-year flexible period, subject to the product terms. You only pay interest on the money you draw, rather than the full credit limit.
These products are often considered for larger or longer-term expenses, such as major home renovations, ongoing private school fees, or debt consolidation. If you consolidate existing borrowing, you may reduce your monthly payments but extend the term and increase the total amount repayable.
Pros and cons of secured loans
Pros:
- Potentially lower interest rates than some unsecured personal loans, depending on your circumstances
- Access to larger loan amounts may be possible, depending on your equity, affordability and lender criteria
- Longer repayment terms may reduce monthly payments, but can increase the total amount repayable
Cons:
- Risk of losing your home if you do not keep up with your repayments
- The application can take longer in some cases due to required property and equity checks
- You may pay more interest overall if you borrow over a longer term
- Fees and charges may apply, such as arrangement, valuation, broker or legal fees depending on the product
2. What is a personal loan?
A personal loan, also known as an unsecured loan, is not backed by your home or any other asset. Lenders look closely at your personal credit history, income, and credit score to decide if they can lend to you and what rate to offer.
With most traditional personal loans, you get the full amount as a lump sum upfront. You pay it back in fixed monthly instalments over a shorter period, usually between one to seven years. The total cost of your borrowing is shown as an Annual Percentage Rate (APR), which includes the interest rate and any mandatory account fees.
In the UK, you can typically borrow between £1,000 and £25,000 with an unsecured loan. At the time of writing, some comparison sites show personal-loan APRs from around 5.7% APR for eligible borrowers with strong credit profiles. Rates can change, and the rate offered may differ from the advertised representative APR.
Pros and cons of personal loans
Pros:
- No need to put your home or assets at risk to secure the money
- Quick to arrange with fast online decisions and funding
- Predictable monthly payments over a fixed timeframe
Cons:
- Lower borrowing limits than secured alternatives
- Rates may be higher than secured borrowing for some customers, particularly where the applicant has a weaker credit profile or wants to borrow a larger amount.
Key differences between secured and personal loans
When you compare these two options, the main differences come down to risk, borrowing limits, and cost:
Security: a secured loan is tied directly to your property as collateral. Personal loans are unsecured, so you do not need to use your home to get approved.
Borrowing power: secured products, including a Selina Homeowner Loan or a HELOC, may allow eligible homeowners to borrow larger amounts because the borrowing is secured against property equity. Unsecured loans are usually capped at £25,000 by most UK lenders.
Interest rates: because secured options are lower risk for the lender, they may come with lower interest rates than some unsecured loans. However, the total cost may be higher if the borrowing is repaid over a longer term. Personal loans often carry higher APRs, especially if you have an imperfect credit history.
Repayment terms: secured loans can run over a longer time, often from 5 to 30 years. This may reduce monthly payments, but it can also increase the total amount you repay. Personal loans have shorter terms, which means you clear the debt faster but face higher monthly payments.
Speed: personal loans are generally quicker and easier to set up online. Secured loans can take longer because the lender may need to assess your property, equity, affordability and legal requirements.
Which option is right for your situation?
Use this checklist to understand which features may matter to you:
- A secured loan may be worth considering if you need to borrow a larger amount, own a home with available equity, and are comfortable securing borrowing against your property. Remember that a lower interest rate does not always mean a lower total cost.
- A personal loan may be worth considering if you want to borrow a smaller amount, need funds quickly, and do not want to secure the borrowing against your home.
- If your credit score is imperfect and you own a home, some secured lenders may still consider your application. Approval is subject to affordability, credit checks, property valuation and lender criteria, and your home may be at risk if you do not keep up repayments.
5. Final thoughts
There is no single best answer when it comes to borrowing money. It is about understanding the costs, risks and features of each option before deciding whether borrowing is appropriate. Borrowing against your home equity may give you access to larger loan amounts and potentially lower interest rates, but it increases the debt secured against your property. Unsecured personal loans offer speed and simplicity for smaller, short-term needs.
Before you apply for any loan, make sure you can afford the repayments now and if your circumstances change. Take time to compare deals from regulated UK lenders and look closely at your budget to make sure you can comfortably manage your payments.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it. Remember, if you consolidate your existing borrowing, you may be extending the term and increasing the amount you repay in total.
