If you want or need to borrow some cash a loan is a popular route to go, and there are two main types of loan to choose between; secured and unsecured. Although they do share some common points there are also some quite major differences between them, and before you pursue either it’s really important that you understand exactly what they are.
First, let’s look at the main features of both types of loan.
- Secured loans are tied to something valuable that you already own, such as a property or a car, (known as collateral). You maintain full control of everything, but if you don’t keep up the repayments the lender is legally allowed to take the collateral and sell it – or force you to sell it – to cover the outstanding debt.
- It’s usually easier to get a secured loan, even with a poor credit history because there is less risk to the lender.
- Interest rates are generally reasonable.
- It’s possible to borrow a decent amount of cash.
- Usually have lengthy repayment periods.
- In some cases the collateral won’t raise enough to cover a large debt, so you could still end up in debt if you default.
- Usually come as car finance packages, personal loans and student loans.
- Failure to keep up with repayments can negatively affect your credit score, and legal action may be taken against you.
- Interest rates tend to be quite high.
- You need a decent credit score to qualify.
- Generally good for borrowing sums between £7- 15,000.
- Some offer repayment breaks.
- Most lenders expect applicants to have a stable income.
Key differences between secured and unsecured loans
How decisions are made
In most cases the decision to grant a secured loan secured loan revolves around the prospective borrower being able to offer decent equity, which could be their home (if there is enough free capital after any outstanding mortgage is paid), a car (if valuable enough), or something else such as stocks and shares. On the other hand, decisions about whether or not to grant an unsecured loan are often based on the applicant securing a good score when their income, outgoings and credit history are assessed.
You don’t need to risk losing your property or possessions with an unsecured loan, but you should always be aware you could lose what is offered as collateral with a secured loan.
Ease of borrowing
Secured loans are easier to get, especially if you have a poor credit history, or a low credit score for some other reason.
These are generally higher for secured loans, but there may be a minimum level of borrowing which is above what you actually want to borrow. It can be tempting then to over-borrow as a result.
Secured loans generally have lower interest rates, although anyone with an excellent credit score may qualify for an unsecured loan with a competitive interest rate.
In general secured loans offer lengthier repayment plans than secured loans.