Secured Loans vs. Unsecured Loans

With a great variety of different loans available, it can sometimes be difficult trying to decide which loan is right for you. Your own personal circumstances, such as your income, outgoings, your credit score, whether or not you own a property, whether you need the loan to be long or short term, and even why you need it, are some of the crucial factors in determining which type of loan will suit you best.

The Secured Loan

A secured loan is a loan where your property is used as security against the money lent. It’s sometimes known as a secured homeowner loan or a second mortgage, and the amount that you can borrow will be calculated based on the equity you have in your property, as well as your personal circumstances. The equity you have in your property is determined by its market value less the amount that is still outstanding on the existing mortgage.

Since homeowner loans are secured, they suit people looking to borrow larger amounts, and many banks and building societies will lend up to £100,000 as a secured loan, although it is possible to find deals for more. Repayments can be spread over periods of up to twenty years, keeping the monthly instalments relatively low.

Interest rates on secured loans tend to be lower than those of unsecured loans. However, factors such as the size of the loan, the length of time over which you wish to make the repayments, the equity you have in your property and your credit score all go towards determining the interest rate you will pay. Depending on these circumstances, the interest rate calculated for you to pay could be higher than expected.

Taking on a homeowner loan is a serious financial decision. If you are unable to keep up with your repayments, your home will be at risk of repossession, so it is vital that you are absolutely sure you will be able to afford the monthly payments.

The Unsecured Loan

Unlike a secured loan, an unsecured loan is available to anyone who has a reasonable credit rating. Although the interest rates can be higher than those of a secured loan, taking out an unsecured loan can still work out cheaper than using a credit card.

These loans are more flexible, in that you can choose how long you wish to make your fixed payments for. An unsecured loan will generally run for a shorter period than a secured loan.

Since there is no property secured against the loan, if you fail to make a payment, there will be no risk to your home.

As with the secured loan, the interest rate you will pay will depend upon various factors, such as your credit rating, the size of the loan and the length of time over which it is repaid. Advertised rates are only representative — depending on your circumstances, you may have to agree to pay a higher rate.

The interest rates and terms on offer for loans can vary significantly. It’s important to shop around and read the small print before settling on the deal that is right for you.