Secured and Unsecured Loan Differences

Posted on August 30th, 2014 by Andrew Twine

With the whole world of finance and particularly mortgage lending changing in such a dramatic fashion recently, more concerns are being raised from borrowers and potential borrowers across the UK.

The Mortgage Market Review was introduced the end of April and since then, even lenders appear to be confused over the exact criteria that is needed to offer their loans to applicants.

fpc

Financial Policy Committee

The Financial Conduct Authority took over the mantle from the Office of Fair Trading as the finance watchdog 1st April and have implemented more stringent rules for the whole industry with the emphasis on payday loans.

Every time Bank of England governor Mark Carney steps out in public speaking on behalf of the Bank and the Financial Policy Committee, the media have a field day promoting his quotes and talking to ‘experts’ to gauge their opinions.

One thing that has stayed true throughout the years as far as mortgages and home loans are concerned though, is the applicant’s credit rating.

It seems quite surprising that with this point being of such paramount importance, how many people have no idea what their credit score actually is.

When a person applies for a secured loan, the lender will undoubtedly check up on the applicant’s credit score. That score will include their credit history and any defaults that show up will be detrimental and will affect the applicant’s chances of receiving a loan.

Therefore it would be wise for anyone applying for any type of secured loan to be completely prepared by checking their credit rating. 

There are many credit score companies that can provide you with a full credit report. The most well known one is probably Experian UK

There are two types of loans and they are categorised into secured or unsecured. Mortgages and home loans comes under the term ‘secured’ and that means that the property you wish to buy may be at risk if you do not continue to meet the required monthly premiums.

Now if by some chance you should unfortunately find yourself in that unenviable predicament, there is still no cause for panic as banks and building societies do not wish to take back your dwelling, but you should be aware of the worst case scenario.

It is also worth knowing the difference between secured and unsecured loans to understand the impact it could have before applying.

loan

A student loan and credit card debt comes under the umbrella of unsecured debt. It is common practice for a student loan to take many years to be repaid as is the condition of this particular debt. However, a prospective lender will take your outstanding loan amount into consideration because of the affordability factor.

A vehicle loan is secured debt, so just like your home your car can also be taken back from you if you do not keep up repayments. Depending on the financial institution that the loan was taken through would probably determine on how lenient they choose to be should you fall into arrears.

On the up side, if you apply for a mortgage and have a good record with a vehicle loan, then lenders see you as a more reliable candidate to loan to.

Payday loans, often referred to as short term loans are unsecured and normally does not show on your credit history. A payday lender has nothing to secure your debt against and for this reason their rates will most probably be much higher than the standard bank or building society.

Like standard home loans, buy to let mortgages for a property you may rent out is a secured loan. You would imagine that bringing a healthy income through this rental would help attain the mortgage amount required more easily. This will come into the lender’s equation, but not for the initial two years of renting.

The formula that most mortgage lenders require is a debt-to-income ratio of no more than forty three per cent. They come to that result by checking out your current debt and how that equates into monthly payments, plus the new loan amount being applied for against your income.

About the author

Andrew Twine Andrew Twine is a Finance Writer at Cash Sorted. He is mostly involved in the administrative side of the office and a valuable member of the team. Andrew loves painting, camping & spending time with his family.

Comments are closed.