When you’re looking for a loan, you have probably seen information for ‘secured’ loans and ‘unsecured’ loans. These are the two types of loan you can take out with a bank or a finance company.
What is a secured loan?
A secured loan means that the lender has some security against the loan. This is usually in the form of a charge on your home. If you don’t pay back the loan, the lender can go to court.
What is a charge on your home?
It is a legally binding document that is filed with the rest of your property papers with the Land Registry. If, for some reason, you don’t pay your loan, your lender can go to court and ask for an order that obliges you to sell your home and pay the loan. If during the of the loan you sell your house because you’ve decided to move, you will either have to pay back the loan immediately or renegotiate with your lender to have the charge transferred to your new home.
What is an unsecured loan?
An unsecured loan is given to you without any security. There’s no charge on your home and you’re given the money on trust. If you don’t pay the loan, the lender can still take you to court, but it is unlikely that you would need to sell your home.
Are there any other differences between the two?
Yes. Secured loans have lower interest rates and are usually for substantial amounts. People who want a new car, a kitchen extension or a home refurbishment, are more likely to get a secure loan. You will normally have a longer period of time to pay back the loan too.
Unsecured loans are personal loans that might be used fora deposit for a car or new furniture. They have higher interest rates as they are for lower amounts of money and they are paid back between 12 and 48 months.
So, there are advantages to a secured loan?
Yes. You can get more money at a lower interest rate over a longer period. It is ideal for someone who needs a large amount of money and doesn’t want to pay it back quickly.
What about an unsecured loan?
The advantages of unsecured loans are that you don’t have to put up any kind of security to get one. You need an income and proof of your address, but you don’t need to be a homeowner. You can also get an unsecured loan very quickly. For instance, payday loans can be paid into your bank on the same day. Another advantage is that interest rates are fixed on an unsecured loan, meaing the amount you pay won’t change, helping you to budget.
Are there any disadvantages to a secure loan?
Yes. Your home could be at risk if you don’t keep up the payments. If you want to sell your house during the term of the loan, you may not be able to transfer the loan to a new property. This means you will have to use the money from the sale of your old house to pay the loan back. So, you may have less money from your house sale than you think. Getting the loan will take longer than an unsecured loan as the charge will need to be drawn up and registered, which can take up to a month to complete. Finally, you might have a variable rate on your loan. If it goes up, you will have to find the extra money for the repayments.
Are there any disadvantages to an unsecured loan?
The disadvantages are that the interest rate will be higher and you can’t borrow large amounts. It might also cost you more money if you want to pay the loan back early, as most unsecured loans have early repayment fines. It will also be more difficult to adjust the repayment amount or the loan period.
Are there any other ways to get a secured loan?
Yes. If you have enough equity in your home, you could take out a second mortgage. This will run beside your main mortgage but it probably won’t be at the same rate. Another option is to find a new mortgage lender and swap your mortgage, topping it up by the amount your need.
For example, if you have a home worth £150,000 with a £60,000 mortgage and you want £25,000 to do some refurbishment, you could look for a new lender. You then ask for a mortgage of £85,000 that covers your old mortgage and gives you the extra money you need. You might be lucky and get a better rate than you’re paying at the moment, meaning if you take out the same mortgage term, you’re better off. However, if you go to a new lender, you will have to pay for the paperwork to be done all over again, so bear these costs in mind.
Can I get a secured loan if I have a bad credit rating?
Yes. There are lenders who will give you the finance as long as they can secure the loan on your home. You will need enough equity to cover it. However, interest rates won’t be as advantageous as someone with a good credit rating, so expect to pay more. Rates vary from 8% to 37% depending on the lender.
Can you apply for an unsecured or a secured loan online?
Yes. Both types of loan can be applied for online. However a secured loan will take longer. You can browse the internet to find a deal that suits you or go through a broker who will search for you. All of the finance companies will require you to own your own home, be over the age of 21 and not be more than either 70 or 80 years of age. The lender will do a credit check to see how many loans you already have and the amount of money you owe on your mortgage, if you have one.