Secured v. Unsecured Loans

What are the differences between secured and unsecured loans? Essentially, whether or not the loan is secured by property in the event the borrower defaults on the loan.

Secured Loans

Secured loans are backed by personal property, usually a home. A secured loan can be made against a home whether it is under mortgage or owned outright. The amount of the loan can depend on a number of factors, particularly how much the owner owes on the property in comparison to the value of the property. The larger this difference, the increased likelihood of a larger loan. Of course, the borrower's credit rating and amount of current debt will also be a factor.

Loan Purposes

Secured loans can be used for a wide variety of purposes, from debt consolidation (such as paying "off" credit cards), to home improvements, to vacation money. The length of time a borrower has to pay off a secured loan will depend on the lending institution and the terms set forth in the loan, but can range anywhere from three to twenty-five years.

Because secure loans are exactly that--more secure for the lender--they typically have a lower interest rate. Interest is charged on the amount borrowed and calculated into an Annual Percentage Rate (APR). The loan is paid back monthly over the term of the loan.

Some arrangements include penalties for paying back the loan ahead of schedule. Secured loans are often larger than unsecured loans, given the security of the loan. Most fall into the £3,000 to £50,000 range, although they can go as high as £100,000.

Do You Have Collateral?

Secured loans are typically easier to obtain than an unsecured loan because of the collateral involved. This makes the loan a potential option for those who are self-employed, recent graduates, or those with poorer credit ratings may be able to obtain this type of loan.Unsecured loans are given without any supporting collateral. Credit cards fall under this category. Because there is nothing supporting the loan, unsecured loans tend to be smaller and have higher interest rates to protect the lender. Unsecured loans are given on the borrower's promise to pay.

What About Your Credit History?

A person's credit history and current debt will have a larger impact on this type of loan because the lender has no guarantee the borrower will pay on the loan, and the lender has no collateral options to collect on in the event of default.

Can You Have a Guarantor?

Lenders of unsecured loans may require a co-signer on the loan for added security. In the event the primary person does not pay on the loan, the co-signer is then held responsible. Unsecured loans vary in the amount of time a borrower has to repay the loan; credit cards do not have a timeframe, for example, but educational loans do.