What is the Difference between an Unsecured and Secured Loan?

An unsecured loan is a loan made to a party without any particular asset offered as collateral. 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 and sell it to repay the outstanding loan and accrued charges / interest. They can however apply for a Bailiff's order to come and take good to the value of the outstanding loan.

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. That said, you are likely to incur other costs such as a valuation and arrangement fee, legal fees, etc.

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 (such as LIBOR or the Bank of England Base Rate).

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.

If there is a clear case of failure to adhere to the terms and conditions of the loan (e.g. the borrower fails to make the payments due under the agreement) then possession is a likely conclusion, although the court may be prepared to give the borrower some leeway where it can be illustrated that there is a plan in place to repay outstanding sums due and maintain a payment schedule into the future.

Here at Mortgage Required, we specialise in secured loans so please get in touch on 01628 507477 if you need more information.

Related articles:

• What is a 'second charge'?