Why secured finance is cheaper than unsecured

Why security lowers the rate

A lender's price is built on the risk of not being repaid. Two things drive that: how likely a borrower is to default, and how much the lender loses if they do. Security attacks the second. When a loan is backed by a charged asset — property, plant, a debenture over company assets — the lender can recover value even in default, so its loss given default — how much it stands to lose if a borrower fails — falls sharply. Lower expected loss means a lower risk premium, and that feeds straight through to the rate you are offered. Unsecured lending has no such safety net, so the lender carries the full loss on any default and prices accordingly.

How much cheaper, and why

The gap varies with the asset and the lender, but secured commercial facilities commonly price several percentage points below comparable unsecured borrowing, and over much longer terms. A first charge over property is the strongest collateral, so a secured term loan or commercial mortgage sits at the cheap end. Lending against equipment or invoices is cheaper than pure unsecured but dearer than property, because those assets are harder to value and quicker to depreciate. The cleaner and more liquid the security, the smaller the premium you pay.

The trade-offs you are accepting

The saving is not free. Secured borrowing pledges a specific asset, and a default can cost you that asset — your premises, your machinery, or the company's book of receivables. It is also slower: valuations, legal charges and registration at Companies House or the Land Registry all take time, often weeks. And a charge can tie up an asset you later want to use elsewhere. Unsecured finance trades a higher rate for none of that — no asset on the line for the facility, and a far quicker decision.

When unsecured is still the right call

Cheaper is not always better. For short-term needs — bridging an invoice, covering a VAT bill, funding a seasonal stock buy — the absolute pound cost of unsecured borrowing repaid in weeks is often small, and the speed and lack of an asset charge are worth more than a fractional rate saving. Many directors also simply prefer not to pledge assets, especially when those assets are the home or the company's core equipment. Credicorp lends to limited companies on an unsecured basis with no personal guarantee, prioritising speed and a clean balance sheet over the lowest possible headline rate. Compare the structures in our secured vs unsecured guide, and weigh the true cost with the true cost of borrowing calculator.