When it comes to loans, they are either secured or unsecured.
With both a secured and unsecured loan you borrow money from a lender and then pay it back (with interest) over a set period of time. However, there are a few key differences between the two types of loans that are worth knowing about.
In this guide, we will talk more about secured loans and our observations about the things you should consider before applying for one. As ever, if you have any questions after reading this post, get in touch with our team using the contact details on our website.
Secured and unsecured borrowing explained
So, what is the difference between secured and unsecured loans? Let’s take a closer look.
Secured borrowing
Secured loans require you to offer up something of value as collateral. This will usually be your home but it could also be another valuable asset, such as your car or an expensive piece of jewellery.
If you default on your loan, the lender could repossess the asset you put forward as security. This is so they can recoup the money they lost by lending to you.
Unsecured loans
Unsecured loans, also known as personal loans, don’t require any form of security. As such, you won’t have to worry about losing your house or your car if you have any missed payments. But as an unsecured loan poses a higher risk for the lender, you may be subjected to a higher interest rate if you choose this form of borrowing.
Generally speaking, unsecured loans are harder to get than secured loans, as applicants need to have a good credit score when applying.
Types of secured loans
Secured loans can be known as:
- Type 1: Homeowner loans
- Type 2: Second charge mortgages
- Type 3: First charge mortgages
- Type 4: Debt consolidation loans
Let’s take a look at each.
Type 1: Homeowner loans
With a homeowner loan (also known as a home equity loan), your home will be used as security.
This type of loan allows you to borrow money against the value (equity) of your home. If you’re looking to raise a deposit for a second mortgage or raise money for home improvements such as getting a home extension then this type of loan might be right for you.
Type 2: Second charge mortgages
A second charge mortgage (also known as a ‘second mortgage’) is another loan that requires you to provide your home as security.
A second charge mortgage is an additional loan to your existing mortgage. So, unlike a remortgage where you would move from one mortgage to another, you will still retain your first mortgage if you take out a second-charge mortgage. This means you will have two lots of payments to manage each month.
Second-charge mortgages can be used to raise money for a variety of different things, from building an extension on your home to making extensive repairs to your property.
Type 3: First charge mortgages
A first charge mortgage is basically a standard mortgage. So, if you are looking to purchase a property, you will take out a first-charge mortgage to buy the house you’re interested in.
With a first-charge mortgage, your home will be used as collateral. While most people use this type of loan to buy a house, some lenders will lend to you on the basis of a first-charge mortgage for other financial goals, such as a business investment.
Type 4: Debt consolidation loans
If you have a number of different loan products, you can consolidate them into one with a debt consolidation loan. This can be a good idea if you’re struggling to make your loan payments and you want to lower your monthly repayments with a loan that has potentially lower interest rates. Again, this type of loan will be secured against an asset, usually your home.
Pros and cons of secured loans
Pros include:
- The interest rates on secured loans tend to be lower than those on unsecured loans so your monthly repayments will be smaller. Be sure to compare secured loans to gain access to the lowest interest rates.
- You can borrow more on a secured loan than you can on an unsecured loan, sometimes up to £100,000 or higher. You can also stretch out your loan over a longer period to make your payments more affordable.
- Secured loans are easier to get if you are self-employed or have a poor credit score as your asset offsets the risk for the mortgage lender.
Cons include:
- Some secured loans have variable interest rates so your monthly payments could increase over time. This won’t be the case if you take out a fixed secured loan as, unlike a loan with a variable rate, you will always repay the same amount each month.
- Arrangement fees and other set-up costs are sometimes more expensive on secured loans. If you decide to repay the loan back early, you may be charged early repayment fees too (which are usually the same as 1-3 months of interest).
- Secured loans are usually repaid over longer periods so, despite your reduced payments, you might pay back more interest than you would on an unsecured loan.
- You might lose your home or any other asset you have provided if you don’t keep up with your repayment schedule.
What should I consider before applying for a secured loan?
Secured loans may seem attractive, especially to people with a low credit score or those who want to borrow more than they could on any unsecured loans. However, they do come with financial and personal risk so before you apply to lenders for a secured loan, you should consider the following.
Your finances
If you don’t make your monthly repayments, you could lose your home or another asset. Therefore, don’t apply for a secured loan until you have considered your financial ability. You should look at your income and outgoings (including your other debts) and work out what you can reasonably afford to pay on a new loan. Be sure to factor in the arrangement fees and other set-up costs included in the annual percentage rate as well as the costs of the monthly payments themselves.
Not only should you look at your current finances but you should consider your future finances too. If you plan to have a child or change jobs, your financial situation could change so keep this in mind before applying for a secured or unsecured loan.
Your credit score
As we said, it’s easier to get a secured loan with a bad credit history than it is to get an unsecured personal loan as lenders will be far more flexible.
However, your credit score does have an impact on the interest rate you will be offered. If you have a good credit rating, you will be eligible for loans with lower interest rates. Therefore, you should still try to improve your credit rating if your credit history has affected it as you will be financially better off as a consequence.
Your home’s equity
The lender will look at how much equity is in your property when you apply for a secured loan. Equity is the difference between how much you owe on your mortgage and how much your home is worth. The lender uses this information when deciding how much to lend to you. The more equity your home has, the more you will be able to borrow.
The lender will also check your home’s equity to get an idea of what they could recover from selling your home if you default on your payments.
How can I find a secured loan?
If you’re looking for a secured loan, you could use one of the loan comparison sites that can be found online. Alternatively, you could speak to your existing mortgage lender (if applicable) as they may be able to offer you a good deal if you have a good track record of making your loan repayments.
Your other option is to speak to a mortgage broker such as ourselves. We have over 40 years of experience and observation to draw on and will investigate and explain the difference between secured and unsecured loans with you as we are not a lender, we can explore deals from a wide range of mortgage providers.
How YesCanDo Money can help you achieve the best-secured loan
There are advantages to choosing a mortgage broker over a comparison site or an existing loan provider when looking for a secured loan.
Mortgage brokers vs Comparison sites
While comparison sites can be useful, they don’t always list all of the available options. And if you make enquiries through a comparison site, some lenders will run a full credit check on you before giving you a quote and this could affect your credit rating.
These are just two of the disadvantages of comparison sites. Should you use the services of YesCanDo Money, you will have access to a wide range of secured loans, including those that don’t show up on comparison sites. You won’t need to make a lot of enquiries either (and risk changes to your credit score) as we will contact each loan company on your behalf.
Mortgage Brokers vs Mortgage Lenders
If you currently have a mortgage, you can approach your existing lender to find out about the secured loan deals they can offer you. However, lenders are biased towards their own products. So, while you might be offered an attractive loan deal, there could be another lender offering better-secured loan rates that amount to lower monthly payments.
As we are not a lender, we aren’t biased toward any one loan product. We work for you and our only bias is toward your best interests.
Get In Touch With YesCanDo money
To learn more about secured and unsecured loans and to gain access to the best-secured loans on the market, get in touch with the professional team at YesCanDo Money. After getting to know you and your financial situation, your appointed advisor will search the market to find you a deal with the lowest interest rate to reduce your monthly repayment on a loan.
Get in touch if you would like more information and benefit from the FEE-FREE advice and support YesCanDo Money can give to you.
FAQs
Should I remortgage or get a secured loan?
This depends on your individual circumstances as there are reasons why one may be better than the other for you.
Remortgaging is advantageous if you don’t want to take out a loan on top of the one you already have. You can save money this way as not only will you have one less loan to pay for but you may be able to remortgage onto a deal with lower interest rates.
Our observation is that people are also happier to remortgage when they are raising money for home improvements to repay credit cards or loans used to carry our improvements on the home.
A secured loan can be advantageous if you have a bad credit score as you will have less trouble getting a loan. You might also choose a secured loan if you face early repayment charges for remortgaging.
These are just a few reasons why you might choose one over the other but to learn more, get in touch with our team and we will explain the benefits of each to you. Alternatively, read our guide, Loan or Remortgage?
Are secured loans easier to get?
Generally speaking, secured loans are easier to get than unsecured loans as there is less risk for the lender. So, even if you have been turned down for a personal loan, you may have better luck when applying for secured loans from the relevant lenders.
Of course, loan providers will want to make sure that you are financially solvent and that you have enough equity in your home before letting you borrow larger sums of money. As such, while secured loans are easier to get than unsecured loans, there is still the chance that your application might be denied.
Can I pay off a secured loan early?
In short, yes, but if you decide to pay off your loan early, you may be subjected to the lender’s early repayment charges. This is usually the cost of 1-3 months of interest but you may have to pay less or more interest depending on the lender.
What happens if I default on a secured loan?
A credit default is what happens when a borrower fails to make their required debt payments.
If you miss one payment, your lender will send you a reminder of the payment owed. If you ignore this and if you default on subsequent payments, this will be recorded on your credit file.
Your lender will continue to chase you for payments and if you don’t come to a reasonable agreement with them, they will likely repossess your asset and sell it! The money they raise will be used to pay off the loan plus the interest rate and late charges.
With an unsecured loan, the lender won’t be able to possess your assets if you default on your payments. However, your credit score will be damaged and you may receive a County Court Judgement (CCJ) asking you to repay your lender. So, while there is a perceived lower risk with unsecured loans (personal loans), there will still be consequences if you default on your payments.
