Secured and Unsecured Loans: What is the Difference?
With so many borrowing options available today, it can be bewildering trying to work out what option to choose when you need extra cash. But despite all the different choices, loans generally fall into one of two categories: secured or unsecured. It is important that you fully understand which type of loan you are getting before applying.
Here is what you need to know about both types of loan.
What are they?
A secured loan is backed by the borrower’s property. In most cases, these loans are secured against the borrower’s home. Lenders consider these types of loan to be less of a risk to themselves, because if the borrower defaults on repayment the home (or other asset) can be repossessed to cover some or all of the outstanding loan amount. Because of this, most secured loans have lower interest rates, can be for larger amounts of money and repayments can be spread over a longer period of time.
Secured loans are generally used to borrow over £10,000 – in many cases, significantly more. For smaller amounts, or for borrowers who don’t own a home, it is possible to get a secured loan against other assets, such as stocks, bonds or your car. Logbook loans, for instance, use your car as security, and can be used to borrow smaller amounts over a shorter timeframe.
What are the pros and cons?
Generally speaking, secured loans have a lower interest rate than unsecured loans – although this depends on the lender and the type of security you are providing, so always check the interest rate before applying for a loan.
Secured loans are also a good option for someone whose credit rating is less than perfect – while in many cases the credit rating will still be taken into account, it is of less importance than the security you are providing.
The downside of secured loans is that you are putting your property on the line. If you don’t keep up with repayments, you could lose your home, car or other asset. It is important to carefully check the details of what you will be paying back and decide whether you can afford to keep up with the repayment schedule.
What are they?
An unsecured loan is exactly what it sounds like – a loan where you do not have to provide your personal property or assets as backing. In this case, you agree with the lender to borrow a set amount of money and repay it over a certain period. Because there is no security for the lender, interest rates are usually higher than for secured loans
Unsecured loans are generally used for smaller amounts of money – depending on the lender, the maximum you’re likely to be able to borrow is £25,000, but most unsecured loans are for less than this, and they tend to work out cheapest for loans of between £7500 and £15,000. They are also usually for shorter periods than secured loans.
What are the pros and cons?
One major advantage of unsecured loans is that anyone with a decent credit rating can get one – you don’t need to own a home, car or other valuable asset.
Also, if you do own one of the above, you are not automatically putting your assets at risk by taking out an unsecured loan. However, if you do default, your lender may take you to court to recover the money, and this can involve them applying for a charging order on your home, so your property may be less secure than it seems.
The disadvantage of unsecured loans is that, while they are generally fairly cheap, easy to obtain and flexible, the interest rates can be high, so make sure you check this and shop around for the best deal.
Another issue is that you will need a strong credit rating to be considered for an unsecured loan. If your credit rating isn’t ideal, you may find yourself unable to get an unsecured loan. You also put your credit rating at risk if you default on payments, and may incur extra charges too.
Choosing a secured or unsecured loan depends on a number of factors – how much you want to borrow, for how long, what assets you have and your credit history – but whatever you opt for, you must make sure you understand your repayment commitments and can keep up with them before applying.