Unsecured and Secured Loans - What is the difference

In this article I urge you to think about the differences between secured and unsecured loans.  There are huge differences which could affect you financially.  Do you really want to choose a loan such as a logbook loan that puts you at risk of losing your car?  Do you need to put your property at risk?  These are the questions many people in the UK need to think about before they get sucked into the loan spiral.

What follows is an explanation of the loan types and what they are good for.

A loan which is secured against one of your assets, possibly be your property is usually known as a secured loan.  The interest rates for a secured loan tends to be cheaper than an unsecured personal loan as there can be more risk if you have nothing as security. It is very important to know the difference between the two.

A secured loan is usually used to borrow large sums of money, which would usually be anything over £10,000 but it may also be used to borrow anything under £3,000. The name is self-explanatory, secured refers to the fact of having something as security.  In case you were unable to keep up the payments on the loan the lender is able to repossess your property.

A secured loan is more risky for lenders, which is why they are usually cheaper than unsecured loans.  However they may work out riskier for the borrower as the loan provider can repossess your home if you fail to keep up with the payments.

Debt consolidation

A debt consolidation loan used against your property can either be a first or second charge. You would usually apply for a first charge mortgage to improve your property to which you would have an existing mortgage.  A second mortgage would involve setting up a new agreement with your existing mortgage lender or a different lender.

If you wanted an advance on your mortgage to borrow additional money against your property with your current lender then you could ask whoever your mortgage is with if this is possible with them.

By increasing your mortgage you will be able to pay a lower interest rate than an unsecured loan, as this would be secured against your property.  Providing you have a fixed interest rate you will be able to pay this on a monthly basis.

The cons

On the down side, if you don’t repay your loan you could end up losing your property. With some secured loans they have variable interest rates which means that the repayments could increase, so it is important to check if the interest rates are fixed or variable.  

Some loans may have expensive arrangement fees so you should work this all out before signing on the dotted line.

An unsecured loan is more straight-forward.  When you arrange to borrow the funds either from a different lender or a bank you will be asked to repay this in full.  As the loan has no security, the interest rate will be a higher.  If you did fail to keep up the payments, the lender can go to court and arrange for you to pay this back in full, this will severely damage your credit rating.

   

If you are looking to get the best secured loan, your first step should be to approach your mortgage lender to see if they have any offers.  Depending on the lender, some may offer a special deal to those borrowers who have a good record of repaying their mortgage.