Difference between a Secured Loan and Second Mortgage


It’s not as easy as it was to get credit as many banks and lenders have tightened their lending policies. If you are a homeowner however, you could opt for a secured loan if you need to borrow money.

A secured loan is loans that are secured against the value of your property. You will then need to own your home outright or have a mortgage on the property. A secured loan is also referred to as a homeowner’s loan or a second mortgage.

There are a few advantages of a secured loan. The first of these advantages is that you are able to borrow a bigger amount with a secured loan then with a normal personal loan that is unsecured. The loan also has a longer pay back term which is usually 15 to 20 years for a secured loan, whereas an unsecured loan has a term of between 5 and 10 years. When there is a longer term to pay back the loan the monthly repayments are usually lower, but you will pay more in total because of the interest that builds up.

There is a lack of flexibility with secured loans as if you pay the loan back early you could face a penalty charge.

The interest rates on secured loans can be lower than the rates that are attached to an unsecured loan but they do vary from lender to lender which means that you should compare rates using an independent comparison site. You will also need to check the fees that the lender will charge.

The rates that you pay will also depend on the size of the loan that you take, the term length and the amount of equity in your home. The equity is the difference between the properties current value and any outstanding mortgage.

When you apply for a secured loan the lender will take into account your credit score when they set the rate.

Generally a secured loan is taken to finance home improvements or to pay off other debts, however there are some pitfalls. The biggest risk is obviously the risk to your home. If you default on your payments then the lender is allowed to repossess your home so that the debt is cleared.

The rates on a secured loan are variable which means that they will move up and down according to the economic market or the lenders own criteria.

An alternative to the secured loan is to increase the existing mortgage on your property which is also known as a further advance. However this is only an option if you have equity in your home. Another option is to switch to another lender and take out a bigger mortgage.