What is the difference between a secured and unsecured loan?

[Pages:2]What is the difference between a secured and unsecured loan?

Secured loan

A secured loan enables homeowners to borrow money from lenders by using their property as security.

Pros Because the loan is secured against your home, the interest rate is normally cheaper than an unsecured loan and you are normally able to borrow more. Typically you can borrow anything from ?3,000 to ?50,000 although some lenders provide finance up to ?100,000.

Also you can borrow the money over a longer repayment term which means you can reduce your monthly payments to an affordable amount by stretching the loan over a longer period.

A secured loan is a good way to borrow money for expensive items such a home improvements.

Secured borrowing can provide a solution for homeowners who have been declined an unsecured loan because of their credit rating.

Cons A secured loan gives the lender a claim on your home and if you don't keep up the repayments you could lose your home.

A common reason people take out a secured loan is to consolidate existing unsecured debts. However putting all your debts together and spreading the repayments out over a longer term usually means you'll pay more interest in the long run. If you do consolidate debts in this way you should not use the breathing space provided by reduced payments to build up even more debts on your credit card, personal loan or overdraft.

Not all secured borrowing is cheap with some lenders charging higher rates than unsecured borrowing. It's important to shop around and get the right type of loan for your particular circumstances.

Unsecured loan

Unlike a secured loan, this type of loan is not secured on your home. Loan amounts tend to range from ?1,000 up to a maximum of ?25,000.

Pros If you fail to repay the loan, the lender cannot repossess your home. As long as you meet the payments, your debt will be paid off within a set time. Borrowing with an unsecured loan tends to be cheaper than using a credit card or overdraft facility. The unsecured market has become much more competitive in recent times with interest rates falling to around 6%.

Cons As the loan is not secured the interest rate is usually higher than for a mortgage or secured loan. If you plan to repay the loan early, it's important to check the terms carefully as some lenders will charge you most of the interest that you would have paid if you had kept the loan for the full term.

The cheapest interest rates which are advertised are usually restricted to the most customers with a

good credit history or those who are borrowing larger sums of ?7,000 or more.

Some lenders will try and sell you payment protection insurance when you take out a loan. This type of insurance is designed to protect your repayments if you fall ill or are made redundant, but is often very expensive. You may already be covered by other insurance and even if you want the reassurance you can always take out the cover from another company.

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