Money advice | Secured vs unsecured loans explained

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Sometimes, finances can really choke you without warning. That’s why loans exist. They assist you in managing your situation and give you enough time to slowly pay the money back. There are two interesting kinds of loans; secured and unsecured. Banks and other institutions prefer lending you money knowing that it’s backed up by some form of asset. These kinds of loans make a cheap way of borrowing very large amounts of money. This is what’s referred to as a secured loan.

Unsecured loans, on the other hand, are available to anyone with a fair credit score. For a better picture, here are some of the major pros and cons of these two types of loans.

What are secured loans?

Secured loans are loans borrowed against an asset. That is, failure to pay back the loan in time gives the lender a right to gain possession of the asset. In most cases, the security against your loan is your own property.

That’s what makes these kinds of loans a bit limiting. You need to have your own property before you can be eligible for them. However, these loans can give you the ability of borrowing huge amounts of up to £125,000.

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What are unsecured loans?

Unsecured loans are less complicated. You don’t have to risk your house or anything. You can borrow money from a lending institution and then agree to pay the amounts on an agreed monthly or even weekly period. Since there’s more risk to the lender, these loans have a much higher interest rates as compared to secured loans.

So what are the consequences of failing to pay? Well, that depends on our lender. You may incur additional charges and considerably damage your credit score. The lender may even go a step further and charge you in court, perhaps to gain claim over your home.

 

Merits and demerits of secured loans

Pros

With secured loans, you’ll have one major advantage; borrowing a huge amount of money. This is the kind of loan you go for when you want to start a huge business that needs immense capital. As mentioned, you could even borrow up to £125,000 at a fairly low interest rate.

Secured loans are also a lot easier to qualify for when you’ve got a tainted credit score. This is simply because you’ll be going your property as security so your credit score doesn’t count as much.

 

Cons

Apart from the obvious risk of losing your home, secured loans may also have variable interest rates. That may mean that you may be charged greater interest rates.

Secured loans may also have a lot more charges than the interest rates. They come with very expensive arrangement fees and multiple other charges such as early repayment penalties. So read the fine print and include all these costs when planning your loan repayment.

Merits and demerits of unsecured loans

Pros

Unsecured loans are a bit less formal, so you’ll have the flexibility of choosing the length to repay them.

You may also be in a position to score some fantastic deals with these types of loans. For instance, some lenders may give you a payment holiday of say two or three months during which you don’t have to pay a cent.

Cons

You’ll generally pay more interest for these kinds of loans. If you’re looking for a short term loan, then the interest rates rise even higher.

Top deals are only open if you’ve got a high credit rating, and are pretty hard to get. So this kind of loan may not suit you if your credit score is low. You may be forced to pay much higher interest rates.

But remember, lenders are increasing each coming dawn, and the best way to score a loan is by doing your research. A number of companies offer comparison services to assist you to find the best deal.