What is the difference between a secured and unsecured loan?

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Anytime you borrow money from an individual, bank or organisation, you are taking out a loan. There are many types of loan available and the loan amount, interest rate and payment terms will vary depending on which type of loan you choose.

One of the things you need to consider when taking out a loan is whether it is secured or unsecured. Both have advantages and disadvantages, so it is important to understand the difference.

What is a secured loan?

A secured loan is a loan that is backed by something you own, an asset or collateral. This can be a property, a vehicle or something of value such as jewellery. When you take out a secured loan you agree that the lender can take possession of your asset if you cannot repay the loan.

If you are approved for a secured loan, then the lender can repossess your asset if you default on payment. In some cases, they may physically hold the item or the deeds until the loan is repaid.

Examples of secured loans include mortgages and vehicle finance. The amount you can borrow tends to be higher on a secured loan because there is lower risk to the lender.

What is an unsecured loan?

An unsecured loan is money you borrow on a promise to pay it back. The risk to the lender is higher so the amount you can borrow may be less than with a secured loan and the interest rate is often higher.

Examples of unsecured loans include credit cards, store cards, student loans and home credit loans. Lenders will carry out checks before they lend you the money. Most lenders look for evidence of a good credit history and/or regular income. However, the most important factor is that you can afford to make the repayments.

Defaulting on your repayments can damage your credit score which may result in you being refused credit in the future. If you are unable to manage your payments, then you should speak to your lender rather than just avoiding the problem.

Which should you choose?

The most suitable type of loan for you will depend on your circumstances. You might not meet the criteria for certain lenders so may be restricted in the types of loan you are eligible for.

There are benefits to both types of loan but there are also disadvantages. A secured loan can often be taken over a longer term and can be for a larger amount. If you are buying a home, then you would take out a mortgage.

It is important to realise that if you default on your loan and your property is repossessed you may still owe money. If the lender sells your asset but the proceeds do not cover the outstanding debt, then you may be liable for the rest.

With an unsecured loan, you do not risk losing your property but you may be subject to higher interest rates and shorter payment terms. This means that you could end up paying back more money over a shorter period. Some loans allow you to borrow money and not start making repayments straight away. Other loans have small repayments over a longer period.

Regardless of what type of loan you choose, the most important thing is to only borrow what you can afford to pay back. Before you agree to any loan, make sure you understand the terms. How much are you borrowing? How much will you have to pay back? What is the interest rate? Are there any additional charges? When is the first repayment due? How often do you have to make repayments?

Morses Club loans

With a Morses Club loan, the money you borrow is delivered to your door and repayments are collected from you weekly. If you would like to find out whether our loans are right for you, then visit our how it works section to learn more.

Representative Example:

£200 loan repayable over 20 weeks at £15.00 per week, Rate of interest 50% fixed; Representative 756.5% APR, Total Amount Payable is £300.