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Loans Section
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What's The Difference Between A Secured & Unsecured Loan and Why It's Important To Understand
May 2006
All loans are either secured or unsecured. This article explains the difference and the factors which determine which one to select when you're looking to borrow money.
When you're looking for a loan, one of the first issues you'll need to decide is whether it should be secured or unsecured. The decision is seldom straightforward so here are a few pointers.
Secured Loans
- The money lent is always secured against a property
- As most homeowners already have a mortgage that's secured by a first charge on your home, the loan company has to agree to take a charge that ranks behind the first charge
- Then, if you sold your house, your solicitor would firstly repay your outstanding mortgage and then the remainder is used to repay the second charge
- Only when the solicitor has repaid all the registered charges, do you receive the rest of the sale proceeds, if any
The most important point you have to understand about any secured borrowing, is that if you default on the repayments, then the lender will automatically have the right to apply to the Courts to repossess your home and sell it to recover the money they are owed. Therefore, you need to carefully consider the matter before you agree to such a charge.
If you are in any doubt, consult your solicitor or financial adviser.
Unsecured Loans
- With this kind of loan there is never any security offered to the lender
- As such, the lender views the loan as a more risky venture as the lender has no automatic route to get back what it is owed
- Therefore you'll appreciate, that if you're not a homeowner you don't have to decide between a secured or unsecured loan as you have nothing to secure a loan against
- Unsecured loans are therefore normally offered for smaller amounts of money between £500 up to £25,000 (sometimes £25,000) with a repayment period set at anywhere from 3-6 years
- Interest rates vary depending on what your credit rating is like, if good then expect to pay under 6% but otherwise rates can go as high as 12% or you'll be refused outright
- If you have any Default notices on your credit file then see the LearnMoney.co.uk article on how to get them removed - Mere details here
Summary
Borrowing money is fine as long as you can afford to pay it back and the interest rate attached is fair. As a rule of thumb it's better to borrow unsecured and it's even better to steer clear of those 'debt consolidation' companies that you see advertising on Cable TV. If you do need to borrow more money on a secured basis then it's far better to talk with your present mortgage provider or a high street bank.
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