Loan Types:
What is the difference between a secured and an unsecured loan?
As the name suggests a secured loan is secured against something that you own. In most cases this would be your house. 'Secured' means that should you fail to repay the loan then the lender will effectively own a share in your house and should you come to sell it they will take back their money plus interest from any profits. In some cases the lender may force you to sell your property in order to recover their money.
This being the case, why would anybody consider a secured loan?
There are a number of benefits to a secured loan. Firstly the interest rate will be lower, because there is less risk to the lender. Secondly, the amount you can borrow is generally higher (up to £100k). Thirdly you can borrow the money over a longer period of time (up to 25 years), which will make the monthly repayments much less.
An unsecured or personal loan, again as the name suggests, comes with no security and therefore represents a greater risk to the lender. If you fail to repay the loan the lender must pursue you through debt recovery agents or the court, which is time consuming and expensive. To cover this increased risk, the lender will charge a much higher rate of interest. There are also limits as to how much you can borrow (up to £15k), and the maximum repayment period is 5 years.
Important Information Your Should Know
There are two very important points to note. If you own your own property and take out an unsecured loan, and then fail to make the repayments, then the lender will apply to put a charge on your property anyway, effectively securing it. The second point is that in the current market, lenders will only provide unsecured or personal loans to people who have either got a pristine credit rating (approx 5% of the population), and/or are homeowners.
