Secured Or Unsecured: Which Loan Is Right For You?

What’s the difference?

There are many types of loans on the market, but mostly they all boil down to whether they are secured or unsecured. So what are the differences?

Security

A secure loan is one where the lender will want something such as your house put up as security. This is so that if you fail to meet your monthly repayments they will take possession of your house and sell it to repay the amount you have borrowed.

Security isn’t always on your house, sometimes if you are borrowing a lesser amount, such as to buy a car, then the security will be the car.

No security

An unsecured loan is one in which you do not have to put up security. If, however, you are applying for a car loan then very often although the loan is unsecured, the lender knows that you have a vehicle that they can use to payoff the amount of the loan if you default on your payments. The issue in this case of course is whether you would let them take the car as unless it’s in the small print it may be possible that the lender has no legal right over your vehicle. But remember you are legally obliged to repay that loan!

Long run

A larger secured loan is going to be cheaper in terms of monthly interest than an unsecured loan. Often these secured loans are actually second mortgages, so like mortgages the monthly repayments are manageable but the interest over a long period is massive. But if you want sums of £100,000 or more then this would be the option for you.

Be aware that with both secured and unsecured loans you may have to pay penalty payments if you decide to pay off the debt early. Typically these will be the equivalent of several months’ interest payments. This kind of information will be found in the small print, so do be thorough when you are searching for the right loan: read all the small print and shop around.

An unsecured loan will be slightly more expensive in terms of monthly interest, even if you have a good credit rating. Most personal loans taken out in the UK are arranged by going down the unsecured route.

Credit rating

Your credit rating may mean you have little choice in what type of loan you are able to take out. If you have had problems in the past fulfilling your obligation to pay each month, whether through your own fault or not, lenders may insist that your new loan is secured.

If you are a home owner then you will need to evaluate the risks associated with putting your home up as security, as it really does put it under a degree of risk. But if you are a tenant then you will have to find anther way of finding security for a loan.

Parent Power

If you don’t have any security yourself then one way of securing a loan is to get a guarantor involved and they will provide the security for you. Usually this guarantor will be a parent or other family member, but sometimes it can be the company you work for. Obviously, you will have to be convinced that you don’t mind your guarantor involved in your personal finances.

Make your mind up time

At the end of the day you have to decide whether you want a loan that is secured or unsecured. Often it will be an obvious choice determined by the reason for the loan in the first place. Above all, always remember to think carefully about whether you can actually afford the repayments on a loan before you arrange one.