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Types of Loans - Secured and Unsecured
Everyone needs to borrow some money at some time or another - whether for a big purchase like a house or the occasional celebration or luxury like a wedding or holiday.
How much you can borrow and the rate a lender charges as interest depends on how they view you as a risk after a credit score - which is a really an assessment of your history as a borrower and how you manage debt.
Generally loans are termed in two ways 'secured' and 'unsecured'.
Secured loans
A secured loan is a legal agreement between you and a lender. Often, lenders call these secured loans 'further advances' because you have already borrowed money from them, usually a mortgage, and you are borrowing extra.
A secured loan works in exactly the same way as a mortgage - which is a secured loan itself.
The bank or building society agrees to lend you a sum of money over a set period. In return you agree to pay back a set monthly amount and allow the lender to secure the loan against your assets - generally your home.
The risk for the lender is lower than other types of lending, because if the loan is not repaid, action can be taken to seize the asset the loan is secured against. For instance, your home could be repossessed and sold to clear the debt.
As the lender's risk is lower, secured loans are often the cheapest way of borrowing large sums of money over a medium to long term - more than £25,000 over a 10 to 25 year period.
The lender registering a legal charge with the Land Registry secures the loan. A legal charge is a note telling prospective purchasers that property is security for a loan.
Your mortgage is often called a 'first charge' and any subsequent secured loans are 'second' or more charges.
Unsecured loans
An unsecured loan is more of a risk for the lender because the borrower promises to repay the money owed but no security is offered against the risk. This makes the interest rates higher.
Unsecured loans are not really suitable for the long term because of the higher interest rate.
Much like secured loans, the borrower has an agreed payment over a set period to repay the money.
With both types of loan, sometimes penalties are due if payments are missed or the loan is repaid early.
Even if a loan is unsecured; if you miss payments, the lender can apply to a court for a charge against your home, providing you own the property. Other articles that may intrest you
In Debt - What You Should Do?
Improving Your Credit Score:
Getting the Most from Your Savings:
Debt Consolidation:
Mortgages and negative equity
Lending has come a long way: advancements in loan services
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