There are lots of different types of credit, but one important distinction is whether it’s secured or unsecured.
As a general rule, credit cards and overdrafts are unsecured, mortgages are secured, and loans can fall into either category. (Unsecured loans are also called ‘personal loans’.)
What’s the difference between secured and unsecured credit?
When you take out secured credit, you agree to use your home (or sometimes your car) as ‘security’. If you don’t repay your lender, they may sell your security as a last resort to get their money back.
You don’t need security to take out unsecured credit, so there’s typically less risk involved – although you can still face fines and even legal action if you don’t make the repayments.
Who can get secured credit?
You normally have to be a homeowner to get secured credit, because you’ll need to own property to use as security. However, in some cases you may be able to use your car (which you’ll also need to own) as security.
Why do lenders want security?
Security (also called ‘collateral’) can help lenders reduce the risk of not getting their money back. Lenders may think you’re a high risk customer if, for example, you have a lot of debt or a history of missing payments. They’ll normally need to lower the risk before it’s sensible to lend to you.
Secured and unsecured: what are the pros and cons?
Below, we’ve explored some of the main benefits and risks of secured and unsecured credit.