Q: What is the difference between secured and unsecured loans? (The following information is provided by Caledonian Express).

Secured Loans

'Secured' means the loan is secured on property, ie your home. The security is in favour of the lender, not you. It enables a lender to force you to sell the property if you default on the loan. Hence the legend 'Your home is at risk if you do not keep up repayments on a mortgage or other loan secured on it'.

HOWEVER, the lender would need the co-operation of your mortgage lender to force a sale, and unless you were also very behind with your mortgage payments, it would be unlikely that the mortgage lender would agree to a forced sale.

Because of the fallback position a secured loan gives a lender (ie they know they will get their money back eventually even if you don't pay), they are more likely to advance monies to you on a secured basis than an unsecured one. Particularly if you have adverse credit history or cannot prove your income.

For the same reason, interest rates and borrowing periods tend to much more reasonable with secured loans than unsecured. Because secured loans are secured on property, they are obviously only available to homeowners.

Unsecured Loans

These loans are not secured on property, they are advanced on the assumption that you will repay the loan on time. Because of this, the risk to the lender is higher than with a secured loan and interest rates are higher than with secured loans.

It would not be true to suppose that defaulting on an unsecured loan cannot put your home at risk. A lender can obtain an order from the court forbidding you from selling without repaying them. Also, any lender can attempt bankruptcy proceedings against you in serious cases, and should the majority of creditors consent (not necessarily with the agreement of your mortgage company), you could be forced to sell under bankruptcy order. However, it is a less straightforward process than calling in a secured loan.

Unsecured loans are available to both homeowners and tenants. However, homeowners will almost always benefit from lower interest rates even on unsecured loans, than tenants. This is because almost a third of loans to tenants are never fully repaid. In order to absorb the increased risk, lenders usually charge higher interest rates to non-homeowners even if they have no adverse credit history.