Secured Loans vs Unsecured Loans: All You Need to Know
While loans come in many different forms, they can generally fit into two categories: secured and unsecured.
Whether you should apply for a secured or unsecured loan can depend on a number of factors, but it’s important to know the difference between them – read on to learn more about both types of loans.
A secured loan is tied to one of the borrower’s assets. This works as a security measure – if the borrower is unable to keep up with repayments, the asset could be repossessed by the lender to recoup the money owed.
Secured loans can be used if the borrower has a poor credit rating or requires a large amount of money – normally at least £3,000 but generally over £10,000. Homeowner loans, a type of secured loan, are generally for amounts up to £125,000, while mortgages can often be much more.
Other secured loans can include: home equity loans, second mortgages, first or second charge mortgages, and some debt consolidation loans. Loans can also be secured against other assets such as a car, an expensive wine collection, or jewellery, and depending on how much these assets are worth, the loan may be for up to one million pounds. The assets act as security, reducing the lender’s risk if the borrower can’t make repayments.
The reduced risk from securing against an asset can also result in some secured loans having lower interest rates than unsecured loans, as well as higher borrowing limits and longer repayment periods.
Mortgages are an example of a common secured loan – the mortgage is secured against the home, and if the borrower misses payments and gets into serious arrears, their home could be repossessed and sold to make up the money owed.
An unsecured loan does not require an asset to guarantee the loan. Borrowers are lent money based on their credit report, application details, and various other factors.
The increased risk can mean lenders might prefer applicants with a higher credit score, or who are looking to borrow a smaller amount of money – normally between £1,000 and £25,000.
It may also mean that some unsecured loans will have higher interest rates and less time to repay the sum compared to secured loans. However, interest rates and repayment periods can be flexible depending on the provider.
What Is the Loan For?
There are a number of factors to ask yourself when deciding between a secured and unsecured loan. Do you need a large amount of money? Do you have a good or poor credit score? Do you have valuable assets to put up, and are you prepared to risk losing them? Or do you only require a small sum? Have you considered any other alternatives to taking out a loan?
Taking any kind of loan requires serious consideration and extensive planning to ensure you can afford the repayments. It can also be a good idea to factor in life changes, such as an unexpected job loss, into your plan/considerations.
Typically, when taking out an unsecured loan, the lender will use your credit history to determine how much they may be willing to lend. Even with a secured loan they may still use your credit history as part of the overall decision. You can get access to your Equifax Credit Report free for 30 days and £9.95 a month afterwards, to understand the type information a lender might see.
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