Personal loans (also known as unsecured loans) and secured loans (second charge mortgages) both involve borrowing a specific lump sum of money. However, there are some key differences that set these two types of lending apart.
Borrowing money via an unsecured loan means you're not required to put up your home or another property as security.
Unsecured loans are usually available for borrowing between £1,000 and £25,000 (although higher amounts can be found) over terms of one to seven years, and can be used for pretty much any legal purpose subject to the lender's approval. It's worth remembering, however, that many lenders will not provide unsecured loans for commercial use – that’s where business loans come in.
To arrange the loan, you need to choose the amount you wish to borrow and the period of time during which you want to repay it. Regular monthly repayments are worked out to ensure that you pay back the full amount of capital, plus interest. And, as each individual repayment contains an element of both the capital and interest, you are guaranteed to repay the loan at the end of the term – provided you make all the payments on time.
Unsecured loans do not tend to come with as much risk as secured loans – your home isn't linked to it so it can't be repossessed if you default – although your credit rating and likelihood of being accepted for credit in the future might be damaged if you don't make your repayments.
Unsecured loans can sometimes be labelled for specific purposes, such as car loans or home improvement loans, but are essentially still a standard unsecured loan.
To find out more about personal loans, why not read our guide on key factors to consider.
A secured loan, also known as a second charge mortgage, allows you to borrow a specific sum of money that is secured against a property. They are treated exactly the same as regular mortgages in terms of the rules that lenders have to follow when they sell and administer these loans.
Second charge mortgages are for existing mortgage holders who are seeking to borrow larger amounts of money (up to £100,000, or sometimes even more). Borrowers have often built up equity in their property that they can use as security against the loan.
If you’re an existing mortgage holder, your property will be secured by the lender by way of a 'second charge'. A second charge mortgage sits behind your main mortgage, which is held on a 'first charge' basis. This is a legal arrangement and is registered with the Land Registry.
You must make regular monthly repayments throughout the term of the loan, generally between a three and 25-year period. Defaulting on your loan repayments can mean your lender can file for repossession of your home. What this means is that they can force a sale of your home, repay the first charge mortgage lender, and then retain sufficient funds to repay the second charge loan.
Both personal loans and second charge mortgages can generally only be used for purposes that are legal and not subject to commercial gain. Business loans are also available, however.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.