This is a blog I wrote to help existing and potential customers understand some of the issues of personal finance that they might find confusing.
Secured and unsecured loans explained
When you don’t have the funds to pay for a holiday, a new car or even a wedding, it’s natural to go searching for a loan. But what loan is right for you?
There are two main types – secured and unsecured – and it’s important to know the difference. Here we explain the pros and cons of both to help you make the right decision.
Firstly, the terms ‘secured’ and ‘unsecured’ are for the lender, not you. Don’t be fooled into thinking that a secured loan must be safer.
Broadly speaking, secured loans are only available to property owners or mortgage holders because it requires you to use your home as collateral for the loan. If you fail in your repayments then the lender can potentially sell your home to get their money back.
An unsecured loan is what you might think of as a typical loan – or personal loan – from a bank or building society. If you default with your payments you’re less likely to lose your home, car or any other asset.
However, you’re still required to pay off an unsecured loan within an agreed period and could end up paying much more back in late payment charges and interest if you don’t.
What are the advantages of a secured loan?
As long as you’re a mortgage holder or property owner, a secured loan is a good way to borrow large amounts of money. Depending on where you go, you could get anything up to £75,000 – but this will depend on your home equity, personal circumstances and ability to pay it back.
You can also arrange to repay the money you borrowed over a longer period, like 20 years. While this might reduce your monthly repayments, you’ll end up paying more in interest in the long run.
It’s also an option if you have a poor credit history.
What are the disadvantages of a secured loan?
In short, you must keep to your payment plan because if you fall behind you could risk losing your home. Terms and conditions can be detailed and lengthy, but as with any contract you enter into you must check them thoroughly.
What are the advantages of an unsecured loan?
They’re easier to get – you don’t need to own a property to get an unsecured loan. They’re also less risky since you’re not securing your home (or any other asset) against the money you borrow.
Although each lender will vary their amounts and repayment periods, you can generally borrow anything from £1,000 to £25,000 and repay it within 1-5 years. By borrowing small amounts and paying it off sooner, you pay less overall.
What are the disadvantages of an unsecured loan?
Lenders need to know that their money is going to get paid back in full and within the agreed period, therefore if you’ve got a less-than-perfect credit history you might struggle to qualify.
Although there’s less risk with an unsecured loan, you can still incur late payment charges if you fall behind on repayments. This will add onto the money you already owe – and, along with the interest you will be paying, it means you could end up paying a lot more than you originally agreed.
Also, it could affect your credit history, which means you may find it difficult to borrow again in the future.
What to consider
When choosing a loan you need to be very clear on how much you want to borrow, and how quickly you can pay it off.
Use a loan calculator to check the APR and total amount repayable. It’s important to arrange a repayment period that’s right for you.
Above all else, consider your income and plan ahead. Be realistic about what you can afford and what you’re putting at risk.