Comparing Secured And Unsecured Loans

Deciding what kind of loan is suitable for your own individual needs can be time-consuming. If you haven’t taken out a loan before, or it was so long ago you think the situation has changed, we’ve put together a broad comparison of secured and unsecured loans. Hopefully this will help you at least decide how you want to raise the finance you need, and you can focus your research and reach a decision.

There are two main types of loan, secured and unsecured loans. They both have their advantages and disadvantages.

Secured loans

• Secured loans (also known as Homeowner Loans) are a loan tied to an asset, like your home.
• Because the loan is secured against something substantial like a house, it holds less risk for lenders so interest rates tend to be lower.
• If you fail to make payments (default) on the loan, your lender can take you to court and even force the sale of your home to recover their money and costs.
• If your mortgage has someone else’s name on it too, you must jointly apply for the loan against the property.
• Set up fees and administrative costs can be added to the cost of a secured loan, either up front (which could put stress on your finances) or spread over the repayment period (possibly with interest applied).

Unsecured loans

• An unsecured loan includes credit card borrowing, personal loans and car finance, where your signature is required as a ‘promise to pay’.
• You can often get unsecured finance even if your credit history isn’t blemish-free, but it might cost you more in interest.
• Also, because unsecured loans are not tied to your ownership of an asset, the increased risk for the lenders is reflected in higher interest rates that affect the amount you pay back.
• If you default on your loan payments, the lender can take you to court to try and get their money back.
• Shopping around and getting multiple quotes for an unsecured loan can show up on your credit rating and be considered a black mark, which could affect your future borrowing.

Other ways of borrowing money.

• Payday loans are considered to be short-term borrowing for relatively small amounts, but the interest rates and hidden charges if you need to borrow more or extend your repayment period can be crippling. Think twice!
• Logbook Loans are popular way to raise money on a vehicle you own, like a car or van. They are similar to a secured loan and easy to arrange, but make sure you use a reputable company, preferably a member of the Consumer Credit Trade Association (CCTA).

When researching your loan, be careful you don’t over-stretch your budget and borrow more than you can afford to pay back, and go with a lender who can give you clear advice and information about the loan you want to take out.

If you’re looking for a quality lender, take a look at our tips in the blog post Signs you have found an ethical lender.