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Last update : November 2013
The Difference Between

'Secured Loan' and 'Unsecured Loan'

Secured Loan
  • The money lent via a 'secured loan' is secured against a property or other asset

  • As most people who take out a secured loan already have a mortgage on their property, the original mortgage has what's called the 'first charge', ie when or if the property is sold the mortgage loan gets repaid first
  • A secured loan will therefore normally always be 'second charge', ie it is secured on the value of the property after the mortgage has been repaid

The most important point to understand about secured borrowing is that if you default on the repayments, the lender will automatically have the right to apply to the Courts to repossess your home and sell it to recover the money owing to them.

Unsecured Loan
  • With an unsecured loan, as its name suggests, there is no security offered as a guarantee to the lender

  • As such, lenders view these loans as riskier than secured ones as they can't force an asset sale (usually of your property) to get money back

  • Unsecured loans are therefore normally offered for smaller amounts of money of between £500 - £25,000 with a repayment period set at anywhere from 1-10 years

  • Credit card debt and personal loans are good examples of unsecured loans
Summary

Borrowing money is fine as long as you can afford to pay it back and the accompanying interest rate is fair. As a rule of thumb it's far better to borrow via an unsecured loan and it's even better to steer clear of the 'debt consolidation' companies that you see advertising on cable TV.

The problem with these companies is that -

  1. The loans offered are only ever secured on your property which means if you default on the loan there's a good chance your home will be repossessed

  2. The interest rates are often extremely high, especially if you have a default or CCJ (County Court Judgment) against your name

  3. The loan period is often too long in the 10-20 year range. This means your monthly payments will be lower but the total amount of interest paid over the lifetime of the loan can be absolutely huge

  4. The loans themselves are often extremely restrictive, ie in most cases you are unable to pay them off early if you are able to due to expensive early repayment charges
Who to use instead of a 'Debt Consolidation' company

Rather than contacting a 'debt consolidation' company, if you are a property owner it would be better to talk with your present mortgage lender and see if they can offer you a better deal via remortgaging. See our guide to remortgaging for more details.

And if that doesn't work then start talking to a number of different mortgage brokers to see if they can help. Read our guide - How to get the right mortgage at the best price for a detailed step-by-step approach. If you follow this guide correctly it should prevent you overpaying when looking to refinance your debts.

Important - Know who you're up against

If you have no choice but to get a secured loan from a Debt Consolidation firm then make sure you really understand what you're buying including the negatives and charges involved.

A good place to start is to read our 10 Secrets to Good Personal Finance.

See also


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