What are the Different Types of Secured Loans?

If you’ve been looking into getting a loan, you might have come across secured and unsecured loans. There are many different types of loans on the market, and one of the big differences is whether a loan is secured or unsecured. But what does that mean?

What is a Secured Loan?

A secured loan is a type of loan that is secured against an asset. This means you put up an asset, such as your home or car, as collateral in case full payment cannot be made.

You might be asking yourself, why would someone risk putting up their home or car as collateral if they don’t have to?

Well, secured loans tend to have lower interest rates as there’s less risk to the lender. They can also allow borrowers to borrow larger sums of money than they would be offered with an unsecured loan.

What are the Different Types of Secured Loans?

Vehicle loans

A vehicle loan, often known as a car loan or car finance, allows you to borrow money to purchase a car or van. Many people can’t afford to buy a car outright, especially a new one. A vehicle loan enables you to borrow enough money to buy a car, and then that car becomes the asset which acts as security for the loan. This means the car or vehicle could be repossessed if you fail to meet repayments.

Mortgage loans

A mortgage is probably the type of secured loan you’ve heard about most often.

A mortgage loan is used to buy a property; you’ll need to put down a deposit or upfront cash lump sum. You then repay the lender each month in the same you would pay rent; however, you’ll pay interest on your mortgage payments. The main benefit of buying a property instead of renting is that any equity (the total value of the property minus any mortgage and secured debt) belongs to you.

Homeowner loans

Homeowner loans are only available to those who own their house or property. Similarly to a mortgage, this type of secured loan is secured using your house as collateral, meaning you could lose the property if you fail to meet repayments.

To be eligible for a homeowner loan, you need to own your house outright or have significant equity in your property and be paying your mortgage.

Share-secured or savings-secured Loans

A share-secured or savings-secured loan is a type of loan that uses your savings accounts as collateral or as your asset. You’ll only be eligible if you have a certain amount of savings, and how much you have will determine how much you can borrow.

These types of secured loans tend to have lower interest rates and could be a good option if you have no credit history or a poor credit score.

However, if you have significant savings available, it might make more financial sense to use that instead. It means you won’t pay any interest, and you won’t risk missing monthly payments.

Secured credit cards

A secured credit card requires a refundable cash deposit, which acts as security. This means that if you miss payments, the credit card provider may keep your cash deposit to repay the debt.

Logbook loans

A logbook loan is similar to a vehicle loan in that you still use your car as an asset to secure the loan. However, with a logbook loan, the lender is not supplying the vehicle and so allows you to borrow money for other reasons. You’ll be able to borrow 60-100% of the car’s worth, but while you are repaying the loan, the ownership of the vehicle belongs to the lender. If you miss repayments, you may have to give up your car or vehicle.

To be eligible, you need to own your car outright.

Should I get a Secured or Unsecured Loan?

Secured and unsecured loans are catered to people with different financial circumstances.

Unsecured loans tend to have higher interest rates because the lender is taking a higher risk lending to you. Unsecured loans also tend to be for smaller amounts of money.

This might suggest that secured loans are the better option, but a secured loan might not be available to you. You need to have an asset to offer which normally means being a homeowner or owning a car.

It also puts you at risk of losing your home, car or other assets if your financial situation changes and you can no longer afford your monthly repayments.

Is a Debt Consolidation Loan a Secured Loan?

Debt consolidation loans can be offered as both a secured or unsecured loan. This means you can choose which one works best for you and your financial situation.

If you’d like a secured debt consolidation loan, you need to have an asset to offer.

Can I use Debt Consolidation to pay off Secured Loans?

In some cases, secured debt consolidation loans can pay off other secured borrowing; however, they are usually used to pay off unsecured loans. This is because secured loans are typically much larger sums and have low-interest rates, meaning it wouldn’t be beneficial to you or your lenders to pay off your secured loans in full.

However, a debt consolidation loan can still cover a range of different unsecured debt, such as:

• Personal loans
• Payday loans
• Catalogue debt
• Store cards
• Credit cards

Unsecured debts like these can add up, and the monthly repayments can get on top of you. If you’re struggling to meet repayments on two or more unsecured loans, it might be beneficial to consider a debt consolidation loan.

It can enable you to turn several monthly repayments into one affordable monthly repayment.

Can I get an Unsecured Loan to pay off Secured Loans?

Typically, you cannot get an unsecured loan to pay off a secured loan. This is because secured loans tend to be for much higher amounts, and an unsecured loan wouldn’t cover the amount you’ve borrowed.

Although you may be keen to pay off your secured loans to avoid the risk of losing your assets, it’s normally more beneficial to keep your secured loans open rather than taking out a large unsecured loan to cover them, as the interest rate on a secured loan is typically lower.