Understanding the difference between secure and unsecured loans is integral when borrowing. Find out what the differences are and what loans fall under each category, right here.
Shopping around for a loan is never easy, especially if you’re looking for your first one. There’s a lot of technical wording used in the financial industry, and if you’re not a pro, it can be difficult to digest. When you’re faced with different loan options like guarantor loans and payday loans, understanding what the jargon behind them means can be the difference between having a high-risk loan or a low risk one.
Luckily, we’re going to go through some of the technical stuff surrounding loans. Specifically, we’ll be discussing the difference between unsecured and secured loans. Understanding what both of these types of loans means for you is crucial as they can be risky. We’ll also give some examples of what loans fall under each category. So, without further ado, here’s the difference between secured and unsecured loans!
Secured and unsecured
In the UK most, if not all, loans can be categorised by two parent categories: secured and unsecured loans.
Secured loans are a type of loan that have something secured against it. This collateral put up against your loan, can be repossessed by the lender if you fail to make repayments. Property or possessions are often collateral for loans, as this assures lenders that should you be unable to repay your loan, their money will be returned. So, if you have your house up for collateral against a loan, and fail to make repayments, your lender can legally repossess your home, making you homeless. These loans are considered riskier as you could wind up homeless.
An opposing pillar to secure loans, unsecured loans are loans that do not require any collateral against them. Instead, the lenders of unsecured loans will place on charges or up interest rates for those that fail to make repayments. In some cases, legal charges are levelled against you. If you do not have to place collateral against the loan (property or possessions), then the loan is most definitely an unsecured one.
In the section below, we look at common types of loans in the UK and see what category (secured or unsecured) they fall under.
6 types of loan
We look at 6 different types of loans in the UK, to see what the differences between unsecured and secured are through examples.
Mortgages are used solely for the purchasing of property, and unless you’ve got a lot of spare cash, you’re going to need one in order to buy a home. When it comes to getting a mortgage, you’ll put down a deposit to borrow the money to buy your house. However, this is a secure loan. Because, you won’t actually own your house until you’ve paid your mortgage off in full. If you fail to make any repayments on your mortgage, your lender can repossess your home (usually after staggered missed payments). This allows them to reclaim the capital they provided you, as they sell your home.
- Credit cards
Whilst these strictly aren’t a loan, you’ll have credit. You have a credit limit attached to your card, meaning you are unable to go over this. Credit cards come with interest rates attached, and you’ll pay back what you’ve spent plus interest. Credit cards are unsecured, as most don’t require you to put up collateral when applying for a credit card. What happens if you miss repayments? Well, you’ll find that you may be hit with some fees and charges that will be added on top of the amount you already owe.
- Student loans
Attending university means that you need to not only pay for tuition fees and also be able to live at university (e.g. pay rent, eat, etc.). So, the government offers student loans that cover both tuition and maintenance. These are offered to those who attend university and are unsecured loans. They do not require any collateral against the loan, and only have to be paid off once you graduate and earn over £25,000 a year.
- Car finance loans
Securing car finance from a dealership is an ideal way to get a car without paying out right. Through different financing such as leasing, personal contract purchase and hire purchase, you effectively take out a loan in the form of a car. This means that most lenders will offer you a secured deal and reclaim the car should you be unable to make repayments on your ‘loan’. Similar to a mortgage, you won’t own the car until the loan is repaid which means it can be repossessed if you fail to meet contractual obligations.
- Payday loans
You may have heard of payday loans, but if not, they are fast pay out loans for smaller amounts. Because they’re unsecured, no collateral needs to be placed up against the loan when it’s taken out. They were designed to borrow funds between payday, however they are risky loans. The APR on them can be as high as 1000%, meaning any missed or late repayments slowly stack up to make the loan even more expensive.
- Guarantor loans
Guarantor loans are a form of unsecured loan. It’s a different way of lending if you have bad credit, as you have a guarantor to guarantee your loan repayments. So, not collateral is required against the loan. You provide a guarantor with your application to ensure that should you be unable to make repayments on your loan, your guarantor will cover the costs for you. It’s a way of ensuring that not collateral is required but the investment is returned to the lender.
It’s essential to understand the difference between unsecured loans and secured ones, as the risks are usually higher with secured loans. When looking for a loan, understanding what could happen if you’re unable to repay is key as you could land yourself in serious financial difficulties and lose your property/possessions.