What’s the difference between a secured loan and unsecured one?

Confused about your next loan, you’re not alone I assure you?

An unsecured loan is a loan made to a party without any particular asset offered as collateral/security. A secured loan on the other hand is secured on your property, which has very different implications.

Unsecured loans are usually for small amounts but can be up to £25,000. The loans are generally repayable over a term of between 1 to 5 years – normally on fixed interest rates.

If you have an unsecured loan, this means that if you become unable to repay under the terms of the loan, whilst you will still remain liable under the terms of the agreement, the lender does not have the immediate right to take possession of your assets. They can however apply for a Bailiff’s order to come and take goods to the value of the outstanding loan via the courts.

If you take a Secured loan, this is in effect a 2nd mortgage or 2nd charge.

The sum lent can usually be much greater, dependent on the financial circumstances of the borrower and the amount of equity available in the house it is secured against. Secured loans are generally available from as little as £3,000 and interest rates are generally much more competitive than unsecured loans.

Secured loans may be for a period of up to 30 years or more and because there is some security offered by the borrower, the risk to the lender is much less. Interest rates are therefore, usually, much less, although interest rates might be variable and dependent on external factors.

The mortgage lender generally has the right to take possession of the property if the loan goes unpaid or if the terms of the agreement are not met they have the right to sell it. This is usually referred to as being in ‘default’ or ‘forfeiture’. This added ‘security’ reduces the risk to the lender and it is therefore usual for a secured loan to be cheaper with interest payments being lower to reflect the lesser risk.

If you have a weak credit history you are more likely to obtain a secured loan than an unsecured loan.

Need some advice?

If you are looking to take out a new loan please do make contact and one of our fully qualified independent advisers will be happy to help.