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Secured and unsecured borrowing explained

By: Anon

Considering taking out a loan, but are unsure as to exactly what the differences are between secured and unsecured loans? We take a look at everything you need to know about them in order to better understand the advantages and disadvantages of both before deciding to make an application, based on information from MoneyAdviceService.

Secured loans explained

These types of loans are mostly used when you need to borrow a considerable sum of money (with this usually being above £10,000) however, it is possible to borrow less, with the lowest usually being £3000 from lenders. Secured loans require you to provide the lender with something as security in the form of a car, high-value possession or property in the event  that you are not able to make repayments on the secured loan. In the majority of cases, borrowers will use as security their property.

There are a number of different names for secured loans, including:

  • First charge mortgage (no existing mortgage, and used for home improvements)
  • Second mortgages or second charges mortgages (setting up another agreement separate from your existing mortgage lender, or using a different lender entirely)
  • Debt consolidation loans (however it is not the case that all these kinds of loans are secured)
  • Homeowner or home equity loans

Advantages of secured loans

  • Typically you will pay a lower interest rate than you would with a personal loan. This is because lending to you is considered less risky for the lender as the money borrowed to you is secured against a high-value possession of yours
  • The repayments are usually made on a monthly basis
  • You often have greater flexibility when it comes to paying back the loan as these are usually spread out over a longer period of time

Disadvantages of secured loans

  • There is a much higher level of risk involved for you when it comes to secured loans, as if you are unable to keep up with repayments, then you risk losing your property entirely as the lender has the right to repossess your home in the event that you default. This means you should make sure before applying for a secured loan that you would definitely be able to keep up with repayments
  • Depending on the lender you decide to get a secured loan from, you may find that you get a loan with variable interest rates. This could be disadvantageous as it means your loan repayments could end up increasing over time, therefore you should always make sure before getting a loan whether or not the rate that you are receiving is fixed or variable.
  • The repayment structure for secured loans tends to be of a longer duration than you typically experience with an unsecured loan, meaning that you will be in debt for a longer period of time

Unsecured loans explained

With this category of loans, you borrow money from a lender or a bank and then make regular monthly payments until the loan has been paid back completely. Conversely to secured loans, you do not need to provide the lender with something as security in order to gain access to credit.

Advantages of unsecured loans

  • You are able to gain access to money without having to provide as security assets that you own
  • As an unsecured loan does not require collateral, you have peace of mind that should you be unable to keep up with repayments, you will end up losing your personal possessions such as your car or home
  • If you are only looking to borrow a small amount of money for a small period of time, unsecured loans may be better suited to you

Disadvantages of unsecured loans

  • Getting accepted for an unsecured loan tends to be more difficult
  • Interest rates tend to be higher for unsecured loans as there is more risk involved for the lender due to the lack of collateral involved
  • The repayment period tends to be shorter

Payday loans are unsecured because you do not need to put down anything as collateral to be accepted, nor will anything be repossessed if you are unable to repay your loan on time. Instead, your eligibility is not based on the value of your asset or collateral, but instead your income, affordability and credit rating – which lenders will assess to determine whether you are right for their loan products and how much you can borrow.

If you are looking to apply for an unsecured loan and are looking for ways to maximise your chances of approval, click here for ways to improve your credit score.

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