As financial advisors we often get asked the difference between secured vs unsecured loans. It’s important to understand the difference because there are risks with both.
What is a secured loan?
A secured loan is money you borrow that is secured against an asset you own, which is usually your home. These types of loans are often used to borrow large sums of money (usually more than £10,000). It is classed as a ‘secured’ loan because the lender will ask for something as security in case you cannot pay the loan back. This is normally your house.
Secured loans are less risky for lenders compared to unsecured loans. However, they are riskier for you the borrower because your home is in danger of being repossessed if you do not keep up the repayments. Secured loans can also be described as homeowner loans, second charge mortgages or debt consolidation loans.
Secured loans normally have a lower interest rate than with a personal loan and your repayments are usually made on a monthly basis. The risks with a secured loan is that your home is the security so you could lose this if you can’t keep up your repayments. Some loans also have variable interest rates meaning your repayments could increase so make sure you know if the rate is fixed or variable.
What is an unsecured loan?
An unsecured loan is when you borrow money from a bank or another lender and agree to make regular payments until it is paid off in full. The interest rates tend to be higher on unsecured loans because your loan is secured on your home.
If you don’t make you repayments, you may incur additional charges which could damage your credit rating. Some loans however could be secured on something else such as your car or a guarantor (a family member or friend) who guarantee to make repayments if you can’t.
*Please note: Your home maybe repossessed if you do not keep up repayments on your mortgage other debts secured on it.