Secured v Unsecured Loans

Applying for a loan can be a daunting experience, as there is a lot to think about. There are 2 different kinds of loans which are secured and unsecured loans. They are very different, and it’s important that you understand the difference between the 2 before you go ahead with any loan application. We’ve outlined details of both below, and given you some pros and cons on each option to help you make an informed decision when choosing the type of loan you would like.

What is a Secured Loan?

This is what is normally referred to as a homeowners loan, which means the debt incurred would be linked to your house. This means that the only people eligible for this would be those who own or are buying a house. You can use these to loan anything from £5,000 upwards.

There are lots of factors that will depend on your personal circumstances such as the duration of the loan, and the interest rate. They will take into account the amount of “free” equity you have. This amount is what you would be left with after you deduct the amount you owe on your mortgage from the value of your home before making you an offer.

What is an Unsecured Loan?

Unsecured loans can be attained by people who don’t own homes – so they tend to appeal to a broader market. It does bode well for you to have a fair credit score, however loans for those with bad credit are also available through a number of different providers.

These days, it’s easy to apply for these. You can generally fill in an application form online and get a decision then. It doesn’t take long to do – however you will need some financial info handy. Normally people borrow anything from £1,000 to £25,000 however you tend to get better rates on loans from £7,500 up to £15,000.

To ensure you have secured a good deal, make sure you fully check the terms and conditions for hidden costs such as early repayment fees.

Pros of Secured Loans:

  • Usually you can borrow larger amounts for secured loans. So this may be a consideration if you are looking to loan substantial cash sums
  • They can be easier to qualify for, since you are effectively putting your house up for security this gives the loan company leverage.
  • You can repay these over a longer period of time, and the monthly repayments make it easy to manage

Cons of Secured Loans:

  • If you don’t keep up with your monthly repayments it is possible you could end up losing your house
  • There are some hidden fees we mentioned associated with some secured loans such as the early repayment fees

Pros of Unsecured Loans:

  • These are more widely available, and suit a broader set of circumstances
  • They have a lot more flexibility in terms of the repayment schemes. You will find that a lot of borrowers offer repayments between 1-5 years
  • You may find that they offer a “holiday” option, which means that you can get 2 or 3 months without repayment at the start of the loan so you can have a bit of respite

Cons of Unsecured Loans:

  • They can have higher interest rates so cost more overall
  • The best deals are generally for people with high credit scores

Are there any Alternatives?

If you want to borrow a fairly small amount of money over a short period of time, 0% credit cards can also be an option. They allow you to transfer funds from your card to your bank account and effectively have it interest free (the time period depends on which provider you go with).

It’s also worth thinking about remortgaging your house if you are looking for a larger sum. You will find that you can get rates that are lower than most loan offers. There could however, be high fees associated with putting this in place – or you could end up making interest payments on the entire amount you owe.

Look for the Best Deal

There are lots of different providers out there, so don’t feel you need to stick with the first company you find – you can shop around to see what the best rates are for you and your circumstances. The terms and conditions when it comes to loans can be a little bit daunting, so make sure you ask your loan provider any questions if you are unsure of anything before signing on the dotted line.

Hopefully you now have a better idea of the difference between secured and unsecured loans, to help you on your way to your financial planning decisions.

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