What is the difference between ‘homeowner loans’ and unsecured loans?

To understand how you may benefit from homeowner loans and how they compare to unsecured loans, it is necessary to spend a little time thinking about the nature of risk.

Risk and its relationship to your loan

Typically, lenders decide both whether to lend money and how much they would charge for doing so, based upon their assessment of the risks they face in advancing funds to you (there are also other factors that influence their decisions).

It is a general principle of the financial markets that the higher a risk is perceived to be, then the higher the borrowing cost will typically be.  As an aside, similar principles apply in insurance.

Yet the reverse of this is also typically true - the lower risk that you present to a potential lender, the more attractive their loan proposition may appear to be both in terms of the sums potentially available and the interest rate you will pay for the borrowing.

Secured lending

If a lending company is considering advancing a significant sum of money, they may seek to reduce their risks by asking you to provide security.

This security is typically in the form of what is called ‘an asset’ - something tangible that you own and which could be sold to raise capital.

In the event that you are unable to repay the loan in accordance with the legal agreements in place, the loan provider will have the right to force the sale of this asset, as a way of recovering the sums of money you owe them.

The asset used as security for a loan may, in theory, be anything, however, in most cases it must be of equal or higher value than the sums you are seeking to borrow.

Motor vehicles and perhaps slightly more commonly, property, are often used as security.  This is where the term ‘homeowner loans’ has its origin.

Pros and cons

It is possible to seek unsecured lending that is not tied to one of your assets.

However, unsecured loans may typically be for smaller sums of money and you may need to have a very good credit history to secure one, so unsecured bad debt loans may not be available to you if you have a less than perfect credit history.

You may find that, typically, the interest rates available through homeowner loans may prove to be more attractive than those available through unsecured lending. This reflects the perceived lower risks of the former for potential lenders.