The key distinction between secured and unsecured loans is that a secured loan (sometimes know as a homeowner loan) is an option available to mortgage holders and property owners. A secured loan is dependent on the borrower using their house as collateral, so that effectively the loan is secured against their property.



This system provides security for the lender; in the event that a borrower cannot meet the repayments required, the lender can enforce the sale of the homeowner's house to cover the cost of the original loan.

Unsecured loans are also known as personal loans. This means that money is made available for any purpose the borrower requires; buying a car, home improvements or settling credit card debts, for example. The repayments are made over a fixed period of time at a fixed interest rate. These differ from secured loans in that there is no automatic link to the borrower's property. The lender can, in certain circumstances, obtain a Court Charging Order while can lead to a Repossession Order – but this is unlikely and the process is much harder to undertake.

Secured loans are useful for homeowners with or without a positive credit score, as the increase in house prices allows them to release that equity. The added security (for lenders) of borrower's homes being used as collateral means that even in the absence a good credit score, something that may otherwise be prohibitive, lenders are likely to agree to a loan. There is also the potential to borrow larger sums of money: the most you can borrow using an unsecured loan is £25,000 whereas secured loans offer up to £100,000.

Competition for custom with both types of loan is fierce between financial institutions, such as banks and building societies. However, supermarket chains have now entered the fray and increased the competition even further: Asda Finance and Alliance & Leicester have both implemented competitive loan policies for both unsecured and secured loans.

With the plethora of offers and deals available, the tricky part for the consumer is to decide which one to apply for. Martin Lewis of money-saving-expert.com suggests a financial re-shuffle before applying, to make sure that you are not overstretched when it comes to repayments.

If you're looking for a secured loan your mortgage provider is a good first port of call. Many of these offer preferential rates for their customers and, while it may not be the cheapest, it is a useful figure to compare others against.

The next step is to use a price comparison website. Sites like Motley Fool or MoneySupermarket are free and easy to use to compare secured and unsecured. They are independent third parties that have no vested interest in ‘pushing' a certain product. You will be required to enter a few details into their ‘loan calculator' or ‘loan comparator' to allow them to search the internet and compare the best deals for your situation.

These comparator websites also have the facility to scour the banks, building societies and supermarkets for the best deals for unsecured loans which, although offer smaller sums over smaller periods of time, can still be as effective according to your circumstances.

Copyright (c) 2007 Jay Smith