Secured Loans vs Mortgages - What are the Differences?
- 30 May 2023
Finances are not easy for the average citizen to understand well, even at the best of times. It has long been suggested that modern school systems are failing students for this reason, in failing to prime them for real-life systems and processes that are essential to engage with – from taxation to mortgages and beyond.
Indeed, many do not have a proper understanding of exactly what a mortgage is – and even less understand what the ‘secured’ part of ‘secured loan’ means. Are there differences between the two? And, if so, which should be used for which purpose?
A secured loan is a financial product that grants someone access to a pre-agreed sum of money, to be repaid over a long period. The loan is secured, in that a valuable asset serves as collateral against it; the lender may repossess the asset in question if the terms of the loan are not met by the borrower.
Secured loans come in a wide variety of forms, with different interest rates and repayment terms dependent on the loan provider and product in question. Typically, the presence of a security brings the rate of interest down, relative to other lending options.
A mortgage is not altogether different from a secured loan but does exhibit some specific features and caveats that sets it somewhat apart. A mortgage is technically a form of the secured loan itself, only with a unique arrangement by which that security is agreed. Mortgages are also a little more structured than secured loans, in that the terms of the loan are capped to a set number of years and repayments are expected monthly.
It is common knowledge that mortgages are lending vehicles for purchasing a property. Indeed, they are purpose-built for the purchasing of property, though there are cases in which mortgage products can be used to release funds for different costs.
With a mortgage, the property that is being purchased is the security by which the mortgage is agreed; in simple terms, the institution that grants the mortgage pays for the property up-front, and owns an interest in it as a result. The value of the property itself is the collateral for your repayment of its value, and failure to repay can result in forfeiture of the property.
Which is Right for You?
So, which of these financial products is the right one for you? On the surface, this question is simple enough to answer, though there are edge cases that can complicate matters somewhat. Mortgages are, as explained earlier, purpose-built; they are ideal mechanisms through which to buy property, whether or not the buyer has the capital to buy outright.
Secured loans, being more general financial products, are useful for gaining access to additional funds in general. These are commonly used as a means of creating a renovation fund, such as to build an extension to a home. In some cases, though, a homeowner might instead re-mortgage their home. This involves paying off the initial mortgage with a new one and can allow them to borrow more against their property while benefitting from favourable mortgage rates and repayment structures.