Secured and unsecured debt consolidation loans. What is the difference?

A secured loan is money borrowed or 'secured' against an asset you own, such as your home. An unsecured loan is not tied to an asset.

Secured loans are also usually repaid over longer periods than unsecured loans, so can cost more in interest overall.

A loan may sound like a simple way to feel in control of your debt, but more borrowing could lead to even more debt.

Use our debt consolidation calculator to find out if debt consolidation or debt advice is right for you.

This is when a lender will allow you to borrow money that is not ‘secured’ against an asset you own, like your home. This means the lender cannot take your home if you don’t repay the debt.

Types of unsecured loans include:

• Personal loans
• Student loans
• Overdrafts
• Credit cards
• Payday loans

Both secured and unsecured lenders will look at your credit history to decide if they should lend the money to you.

Exactly how much you will be able to borrow depends on your credit score and if you already have loans with the same lender.

Different banks and lenders will have different borrowing limits. Unsecured loans usually start from £1,000 and can go up to £25,000 or even £50,000 with some lenders.

There are also things lenders will say you are not allowed to use these kinds of loan for, like buying property or making mortgage payments. And there will be other terms and conditions to make sure you understand.

Unsecured loans are less ‘risky’ than secured loans because you don’t agree to lose your home if you cannot make the repayments. But that does not mean they are not risky at all.

Your home might not be at risk, but even one missed payment can affect your financial future. Late payment fees could be added to the amount you owe and interest added will only increase the amount you owe. You will most likely get a default notice on your credit file. This could affect your chances of getting credit in the future.

Missing even more repayments could lead to legal action like CCJs (County Court judgment).

A secured debt consolidation loan works like a second mortgage. This is why it is sometimes called a ‘homeowner loan’. It is designed for people who own property to join their debt into one loan that is tied to their home.

Secured loans are often easier to get and have lower interest rates. But there are risks with using secured loans to pay back debts.

If you miss payments and cannot pay back the loan:

• The lender can take and sell your property, and
• Your credit rating will be affected

You need to be very sure you will be able to stick to the loan repayments and avoid having your home repossessed.

Secured loan repayment terms are often for a lot longer than unsecured loans. The monthly repayments might look more manageable, but the total debt is stretched over many years. This means you will pay much more in interest.

Find out more about what might happen if you cannot pay your secured loan back.

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Unsecured debt consolidation loans are not tied to any properties. They are also known as ‘personal loans’.

When you apply for an unsecured debt consolidation loan you are applying for new credit. It is a way to bring many debts into one place and find budgeting easier with one monthly payment. You don’t tie the debt to your house, like you do with a secured loan.

But there are still risks to think about, like:

• More borrowing could lead to even more debt
• New borrowing could affect your chances to get other credit
• Paying interest for the loan increases the amount you end up borrowing
• Not paying in full each month could mean a default notice on your credit file

Interest rates can be different based on your credit history. This means they will most likely be higher if you have a poor credit history.

If you struggle to keep up with repayments, you may be able to reach an agreement with the lender for lower payments or paying over a longer period.

Find out more about what might happen if you cannot pay your personal loan back.