When looking to borrow money, it is important to understand the difference a secured or unsecured loan and why you might want one. Whether you are looking to purchase a new car, wanting to consolidate debt, or take out a loan to renovate your home, both secured or unsecured loans could be an option. The decision will depend on your personal circumstances and various factors that you need to consider.
- Require an asset to secure the loan against —usually this is your property in order to get a secured loan
- Tend to be for larger amounts.
- Tend to be over a longer period of time.
- Can result in lower interest rates.
- Do not secure the loan against your assets.
- Typically these are for smaller amounts ranging from £1,000 – £35,000
- Tend to be for a shorter period of time.
- Interest rates may be higher than a secured loan
What is a Secured Loan?
The Definition of a Secured Loan
A secured loan means that you can borrow money secured against an asset that you own. Secured loans are taken out over a fixed period of time, in which you agree to pay back the loan. Failing to do so, or defaulting on the loan, may result in the sale of the asset in order to recoup any losses.
What are Secured Loans for?
Secured loans are used to borrow large sums of money against something you own, using it as collateral. They are often used for major expenses, such as large-scale house improvements or debt consolidation, and can be taken out over a long period of time. – If a secured loan is taken out against your property, you are agreeing that, in the case that you can’t pay off the loan, you may need to sell your house to make the payment. Likewise, if you used your car as an asset, it may be repossessed if you don’t keep up your repayments. Lenders may see secured loans as lower risk because they know they can collect the money you owe from your assets – if you don’t make the repayments. Because of this security, secured loans may come with better interest rates and longer repayment terms. This can mean lower monthly repayments compared to an unsecured loan -.As with all borrowing, you should consider the total amount you will need to repay overall when considering a product. The amount you are able to borrow and the rate that you are quoted by the lender will depend on your circumstances as with all loans – and with a secured loan, the amount of equity you have in your property will also affect this. If you are a homeowner but your credit history is not perfect, you might find that you are offered secured loans. –
What is an Unsecured Loan?
The Definition of an Unsecured Loan
So, what is an unsecured loan? Well, an unsecured loan is quite straight forward. You borrow money from a lender over a set time period in which you agree to pay back the loan. An unsecured loan is not secured against an asset but failure to make payments on time can can incur additional charges or consequences such as affecting your credit rating.
What are Unsecured Loans for?
Typically speaking, unsecured loans are used to pay for smaller expenses compared to secured loans, these could be things such as car repairs but they can be used for home improvements, a car purchase or debt consolidation. Being smaller value loans, unsecured loans tend to have a shorter repayment terms than secured loans. There can be flexibility and you can pay over various terms of up to around 7 years. Unsecured loans can have a simpler application process than secured loans as they are not secured against an asset It is important to note with unsecure loans, if you don’t make payments, it is possible that additional charges could be applied to the loan. This will show on your credit record. Likewise, in the event that an unsecured loan is not able to be paid back, the lender may still take action to get their money back.
How to know if a Secured or Unsecured Loan is right for you
When looking at a secured loan vs an unsecured loan, there are several things to take into account. If you only want to borrow a small amount of money, for a car repair or small home improvement, then an unsecured loan may be the right option for you. Unsecured loans can be ideal for small amounts of money, with no need of an asset to be secured against the loan. Unsecured loans can also have shorter repayment periods; however, they can also have a higher interest rate. This is due to the shorter lending period. Secured loans, on the other hand, can be for larger sums of money. It is for this reason that they can be suited for large home renovation projects, or to consolidate debt. Secured loans, unlike with unsecured loans, require for an asset to be placed against the loan. It is for this reason that secured loans often require the borrower to be a home owner, in order to use the house as collateral. This is not always the case as, depending on the lender and the amount, other assets can be used – like a car or valuable jewellery. The second aspect worth considering your loan is what your credit score is like. Credit score is taken into account with both secured and unsecured loans. If your credit score is good or excellent then it may be possible to get a high value unsecured loan. If, on the other hand, your credit score is lower than good, then a secured loan may be more viable.
Choosing the Right Loan for You
Before areeing a loan, it is absolutely vital to ensure that the secured or unsecured loan you go for is right for you. If you would like independent advice, it is possible to contact the Money Advice Service. The Money Advice Service is an independent service that offers free, impartial advice. Call 0300 500 5000 or visit the Money Advice Service website.