What is the difference between a secured and unsecured loan?
There are a few fundamental differences between these types of loans that are important to understand, to ensure that you chose the right loan for you.
With a secured loan, your home acts as a form of security for lenders. This therefore means that lenders have the right to repossess your property to take back the money they are owed.
Whereas with an unsecured loan, the money you’ve borrowed is not secured to any form of asset. As a result, mortgage lenders tend to consider unsecured loans as higher risk than a secured loan because there is no collateral in place.
Instead, lenders will primarily rely upon the applicant’s credit rating and agreement to repay the loan.
Usually, applicants are allowed to borrow a larger sum of money with a secured loan, which has a lower interest rate in comparison to an unsecured loan.
This is because the asset used to secure the loan reduces the financial risk for lenders. Although, this is dependent on other factors related to the borrower’s personal circumstances.
With an unsecured loan the amount you can borrow is usually smaller, with a higher interest rate. This is because lenders are take a bigger risk, as an asset hasn’t been used for security.