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2008-02-22 04:38:02
Why Are Secured Loan Interest Rates Higher Than Mortgage Rates?
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 This is a legitimate question that has been emailed to us quite a few times over the past few months, so I thought that I would address it.
People are wondering: if secured loans are "guaranteed", then why are secured loan interest rates higher than mortgage interest rates?
To understand the answer, you need to fully understand exactly how secured loans work. When you take out a secured loan, you are adding the secured loan lender to your mortgage. You have your original mortgage company on their first, and then your secured loan lending company is added as a second mortgage.
Let's say that you default on your mortgage and secured loan payments. The house will be sold in order to recoup the amounts outstanding on both the original mortgage and the "second mortgage", or the secured loan.
Because the original mortgagor is first in line, they will be paid out (in full) first. Let's say that there is a 200k mortgage on a property, plus a 50k secured loan. Let's say that the seller defaults on their payments and the house is repossessed and sold. Let's say that the house is sold for $230k due to weak market conditions. Well, the full $200k would be paid to the first mortgagor, with the remaining $30k going to the secured loan firm. So as you can see, secured loans are not 100% risk-free for the secured loans lender.
There is a much greater chance that the original mortgage company will be paid back in full, compared to the secured loan company. So, there is more risk for the secured loan company, so they will end up charging more in interest. That's the reason. Because a secured loans firm will usually get most of their loan back, they can afford to charge less interest than an unsecured loan, but they have to charge more than a secured loan.
I hope that this clears it up.
Apply for a Lending Place secured loan today!
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