Personal Loan or Secured Loan - What's the difference?

If you start looking for loans because you need some extra cash, you will come across different choices when it comes to the loan you can take out. One of the most common choices you will face is between a personal loan and a secured loan.

Both these loan types are quick ways to raise finance, but they do have significant differences you need to understand.

What are secured loans?

Secured loans are secured against something, usually a property, but it can also be a vehicle. The property or vehicle needs to have little or no finance against it. In the case of a vehicle most lenders will want no finance against the car, however with a property, the lender will need you to own a certain percentage of the building.

If you have a current mortgage, the lender can set up a second charge loan, which is another type of loan that runs alongside the main mortgage.

Secure safe

What are unsecured loans?

When you take out an unsecured loan the lender is not using anything as security. The lender will run an income and expenditure check against you to make sure you can afford the loan, and in most cases a credit check to assess your lending history. You normally need to have a good credit history to be accepted for an unsecured loan. It can often be easier if you have an existing good relationship with a lender and have shown that you have a good record of making regular loan repayments.

You will be able to borrow a certain amount and the lender will set out your monthly payments which will depend on how long you want to take the loan out for. You will generally pay a higher interest rate for an unsecured loan than you would for a secured loan because the lender is risking more without security.

You are generally not risking your home or vehicle when you take out an unsecured loan, because you arenít using them as security. However if you donít make your loan payments you are putting at risk your credit record and your ability to borrow any more money in the future. Of course if you never pay back your loan you could be at risk of CCJís and even a visit from bailiffs.

Any loan that you choose should be thought about carefully and you may feel like you want to seek advice from a debt advisor who will be able to independently advise you. Most loan companies now have to lend responsibly but it still a good idea to ask for other opinions before you sign a credit agreement.

The information in this article is not to be treated as advice. If you need advice or further help, speak to Citizens Advice or an independent debt advisor.