Secured loans vs Unsecured Loans

A secured loan is money you borrow that is secured against an asset you own, usually your home. The interest rates tend to be cheaper than with unsecured loans, but it can be a much riskier option so it’s important to understand how secured loans work and what could happen if you can’t make the payments.

Secured loans are often used to borrow large sums of money, typically more than £10,000 although you can borrow less, usually from £3,000.

The name ‘secured’ refers to the fact that a lender will require something as security in case you cannot pay the loan back. This will usually be your home.

Secured loans are less risky for lenders, which is why they are normally cheaper than unsecured loans.

But they are much more risky for you as a borrower because the lender can repossess your home if you do not keep up repayments.

There are several names for secured loans, including:

  • Home equity or homeowner loans
  • Second mortgages or second charge mortgages
  • First charge mortgages (if there is no existing mortgage)
  • Debt consolidation loans (although not all of these loans are secured)

Unsecured loans explained

An unsecured loan is more straightforward – you borrow money from a bank or another lender and agree to make regular payments until it’s paid in full.

Because the loan isn’t secured on your home, the interest rates tend to be higher.

If you don’t make the payments, you might incur additional charges. This could damage your credit rating.

Also, the lender can go to court to try and get their money back.

This could include applying for a charging order on your home – although they should make clear upfront, whether or not this is part of their business strategy.

Some loans might be secured on something other than your home – for example, it could be secured against your car, or on jewellery or other assets that you pawn, or you could get a loan with a guarantor (such as a family member or friend) who guarantees to make repayments if you can’t.

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