Secured vs unsecured loans: What’s the difference? - by Jessica Foreman

Thursday, 11 August 2016
Loans are predicated on one simple premise; the lenders want back what they leant out, plus more. If they don’t think you’ll be able to pay it back, or provide an alternative of equal or greater value, they’re less likely to give you the money.

Some loans are secured and some are unsecured, and to understand the difference, the key words in the opening paragraph are ‘of something of equal or greater value'. Unsecured personal loans do what they say on the tin; the borrowing of a certain sum of money, to be paid back periodically plus interest, over a set period of time.

There’s nothing more to it; a company assesses whether you are eligible for the sum you have applied for using your credit rating, and either says yes or no. If you fall behind on payments your credit rating will be damaged and you may incur additional charges, and in the end you may face a court order – but this is usually a last resort. More likely, you’ll pay it back and boost your credit rating at the same time.

Conversely, a secured loan uses something as security, so that the lender knows they will get something back if a borrower defaults on a loan. The usual largest physical asset is in the applicant's home, meaning that if someone takes a secured loan they are using their home as collateral.

The prospect of this should be enough to keep people focused on paying the loan promptly each month, for fear of ending up homeless if they do not. If your home is not put up as security, then it could be your car instead – companies are making efforts to provide new and interesting alternatives to traditional refinancing.

One of the main advantages of secured loans is that your interest rates should be lower than an unsecured loan (because of the level of security). It might also be relatively quick to get a decision for the same reason. However, these interest rates are sometimes variable – check before you sign up, because these rates may rise and give you a nasty surprise. You might also need to pay arrangement fees; we’re talking about a financial relationship where a physical structure worth tens or hundreds of thousands of pounds is at stake. Losing a home and therefore a secure base, even if you don’t own it, is psychologically devastating.

Obviously, your choice depends on a number of factors, not least the question of whether you own a home/car or not. Do your research using price comparison sites; find a loan that suits you, and decide whether a secured or unsecured loan is the best option financially or for your peace of mind.

For an unsecured loan, an successful application will depend on your credit rating, so you might not be able to get the best loan possible. There may also be certain terms and conditions that you have to meet, so check the small print. For a secured loan, don’t be star struck by the larger loan amounts and sign away your house into an impossible arrangement that could damage you forever.

Jessica Foreman is a Durham University graduate specialising in business and lifestyle based writing. She has developed her skills on projects surrounding The British Broadcasting Company, and running a print and online based magazine whilst at university. She is currently looking towards starting her Masters in Mobile and Personal Communications as well as broadening her horizons through travelling.