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What’s the Difference Between a Secured and Unsecured Loan?

If you’re shopping around for a loan, you may be confused by all the different options out there and wondering which one might be best for you.

Whether you’re looking to borrow money over a long-term or short-term basis, you’ll have to choose whether you want your loan to be secured or un-secured.

 

So, what’s the difference?

A secured loan is a sum of money that you borrow against ‘collateral’ like your home. They are ‘secured’ because the lender will ask you to put something down as security in case you can’t afford to pay the loan back.

These are usually used to lend large amounts, usually over £10,000, although some lenders offer secured loans of anything over £3,000.

This type of loan is generally cheaper than an unsecured loan. That’s because it is a lot less risky for the lender because they can sell the collateral to get their money back if a borrower defaults.

As you know, this also makes a secured loan much riskier for you as the borrower. Most commonly, people will use their homes as the security for the loan. So, if you don’t keep up with your payments, the lender will be able to repossess your home instead.

Secured loans can go by different names, such as

  • Home equity loans
  • Homeowner loans
  • Second mortgages
  • Second charge mortgages

A second charge mortgage usually involves setting up a separate agreement with your mortgage provider to borrow additional money against your home.

If you have no existing mortgage but you take out a loan for home improvements secured on your home, this is known as a first charge mortgage. Debt consolidation loans can also be secure but not all of them are. Always make sure you check your lender’s conditions before taking out any kind of loan.

Secured loans do not always have to be borrowed against your property – some lenders will accept cars, jewellery, and other assets as collateral. Alternatively, you may be able to get a loan with a guarantor, such as a friend or family member who agrees to make your loan repayments if you are unable to.

Some secured loans will also have arrangement fees and charges which can add to the amount you have to repay. Ensure you know exactly how much you’ll need to pay back. These set-up costs should be automatically included in the Annual Percentage Rate of Charge – known as the APRC, which is the secured loan equivalent of APR.

 

How does this Differ from a Unsecured Loan?

An unsecured loan, on the other hand, is your more typical type of loan. They’re fairly straightforward – you simply borrow money from a lender and pay it back in regular increments. This is usually the case for credit cards and personal lines of credit.

You don’t need to put anything up for collateral with an unsecured loan which lowers the risk to you. If you should for some reason not be able to make a payment, your home and belongings would be safe.

But, since the lender technically has no guarantee they will definitely get their money back, the risk for them to lend you the money is much higher.

Because of this, interest rates tend to be a bit higher and borrowing limits tend to be lower for unsecured loans.  And, if you happen to miss a payment, you may also have to pay late payment charges which could also damage your credit rating.

If you continue to default on your payments, the lender could take you to court to get their money back. This could technically result in them applying for a charging order on your home, so – like with a secured loan – you could still be repossessed.

 

Which is right for you?

This really depends on your personal circumstances and what you’re willing to put up as collateral for your loan.

Assuming you’re a homeowner, if you choose a secured loan, you would pay a much lower interest rate and borrow much larger sums of money. But, if for any reason you were unable to repay the money, you could potentially lose your home.

Since many of these unsecured loans also have variable interest rates, the amount you pay each month could vary greatly.

If you are only looking to borrow a small amount of money, or do not have any assets to put up as collateral, an unsecured short-term loan may better suit your needs.

To apply for a short-term loan through Moneypod, please click here to start your no-obligation application. Once we have your details, we’ll match you up with the short-term lenders most likely to be happy to welcome you as their newest customer.