When you’re looking for credit, one of the main decisions you’ll have to make is whether to go for a secured or an unsecured loan, but what’s the difference? Here’s some information on secured vs unsecured loans.
What is a secured loan?
A secured loan is one which is based on an asset you own. This asset (such as a car, a house or a valuable item) is used as collateral, which means a portion of its value can be borrowed ‘against’ the item. If you do not pay the loan back in full and on time then the asset in question may be seized to cover the payments.
This type of loan draws money from the property you live in. Your home may be repossessed if you cannot pay.
A mortgage is a type of secured loan which is secured with the home you’re buying. Again, your home could be taken from you if you cannot pay the mortgage payments.
A logbook loan allows you to take money from the value of your vehicle. You will need to leave your ‘logbook’ (known as a V5C registration certificate in the UK) with the lender for the duration and you cannot sell your car while you’re paying it back.
Pawnbrokers lend you money against the value of personal items such as jewellery. The pawnbroker will keep the item for the loan duration and if you don’t pay the installments properly, your belongings may be sold.
An unsecured loan is one which is not based on any assets, but which places more importance on your credit history. As unsecured lenders do not have any physical security in the form of an asset, they may be stricter about who they lend to and interest rates can be higher.
When looking at secured vs unsecured loans, a main deciding factor may be the reason for the loan in the first place. An unsecured guarantor loan, for example, may be better than a secured pawnbroker loan, but this would depend on the amount you require, what you can pay back, what you’re willing to pay in interest and the unsecured loan limit, among other things.
Personal loans are lent out depending on credit history and ability to pay. They are usually repayable in monthly installments.
Guarantor loans allow those with a less-than-perfect credit history to borrow at lower rates than they may be offered elsewhere. Lenders need a guarantor to ‘co-sign’ the loan agreeing to pay if the borrower can’t.
Also known as payday loans, these should be for emergencies only. Interest rates can be very high with this type of loan.
Knowing which type of loan is best for you can be tricky, however if you do not currently own your home and if you don’t have a car or other valuables to use as an asset, you will find it difficult to get a secured loan!
The benefits/pitfalls of secured vs unsecured loans are different for each person, so there is no right or wrong answer. What’s important is that you are happy with the structure and the rules of the loan and that you can easily afford to pay it back over the term.
Unsecured loan lenders are more likely to report to credit reference agencies, so if you want to build up your credit rating (so that more and cheaper credit options become available to you in the future), an unsecured loan could be the best way to go. The maximum unsecured loan amount you can get is likely to be dependent on your current credit history, your income and your outgoings. Shop around to work out the best option for your particular circumstances.