What is the Difference Between Secured and Unsecured Loans?
When applying for a loan, your priority is to get the lowest monthly repayments, but there are some other factors too that you must consider. Loans come in various forms, and generally, the loans are divided into two categories, namely secured and unsecured loans.
Applying for any of these loans depends on several factors, so it is necessary to know the difference between secured and unsecured loans for making the correct decision. Here we will explain how secured and unsecured loans work.
In This Article:
Why plan for a loan?
There are various questions that you must ask yourself when planning for any loan. Some of them are:
- What is the status of your credit score?
- Do you need a large sum of money or require only a small amount?
- Do you have some valuable assets to offer as a security?
- Can you go through the trouble of losing those assets?
- Have you considered an alternative to a loan?
When you consider taking secured or unsecured loans, it needs serious planning so that you can comfortably afford monthly repayments even in unexpected hard times, such as job loss, etc.
Typically, your credit history plays a crucial role when making an overall decision.
What is a secured loan?
In this type of loan, the borrower provides some form of collateral to the lender. The monetary value of collateral should be higher or equivalent to the borrowing amount.
This will act as a form of security in case you fail to make a loan repayment, protecting the lender from loss.
The collateral is usually a borrower’s property in cases of secured loans. In the case of auto loans, the collateral is the vehicle you purchase. People who own homes can borrow from £5,000 upwards.
The borrowing amount, loan duration, and the interest rate depend on various factors.
Secured loans have low-interest rates as they are less risky for lenders. But these loans are risky for borrowers as they can lose their property if unable to make repayments.
How do secured loans work?
You can keep your collateral as long as you make the loan repayment as per the lender’s agreement, and at the same time, your credit also builds up. When the loan is paid off, the collateral belongs to you.
Secured loans are better for lenders as they keep a guarantee that is equivalent or higher in value than the borrowed amount.
So secured loans offer low risk to the lenders, and these loans are easier to qualify for even when the borrower doesn’t have an outstanding credit score.
What happens to a secured loan defaulter?
The lender possesses the legal right if a borrower turns out as a defaulter. The legal agreement plays a crucial role.
Lenders can take possession of the collateral. Defaulting results in foreclosing on the house, and in case of a vehicle loan, the lender can repossess your vehicle.
When the borrower cannot repay the loan, it negatively affects the credit history and the overall credit score. The repossessions and foreclosures impact the credit score for a long time.
Merits of Secured Loans
- Secured loans are appropriate for people who have a less-than-perfect credit history. Secured loans are easier to qualify for as property acts as the security.
- These loans offer higher amounts than personal loans.
- Low-interest rates
- The loan repayment period can be extended longer with monthly fixed payments.
- The monthly repayment plan is easy to manage.
- Lower risk for lenders
Demerits of Secured Loans
- Secured loans are risky for borrowers as they can end up losing their home if unable to keep up repayments.
- The charges can increase the borrowing cost. So, it is essential to check the terms and conditions when applying for a secured loan.
- The variable interest rates of some loans can increase the repayments. Ensure that you are aware of the status of the rate, i.e., fixed or variable.
What is an unsecured loan?
Unsecured loans are straightforward and are offered to borrowers who have fair credit scores. Moreover, this loan does not keep your property as collateral.
Borrowers have to make regular repayments until the loan amount is paid in full. As this loan does not secure any property as a security, the interest rates are higher than secured loans.
Additional charges are levied if repayment is not made that can negatively impact the credit rating. To avoid this, it is essential to check the terms and conditions.
Merits of unsecured loans
- Unsecured loans are available to people easily.
- These are flexible, and the borrower can choose the loan repayment time as per convenience.
- Unsecured loans offer fixed repayments.
- Some loans offer a payment holiday of two or three months at the start of the agreement.
- The best loan rates are provided when payment is made over three to five years.
Demerits of unsecured loans
- The interest charges are expensive.
- Better deals are available to people with high credit scores.
- People with lower credit ratings will not get advertised interest rates.
- Interest rates and monthly repayments are higher than secured loans.
Risks involved in secured and unsecured loans
Secured and unsecured loans involve some of the same risks, such as:
- Negatively impacting the credit record when repayment is hindered.
- People could borrow money that they cannot afford to repay.
- Late or missed payment can result in a penalty.
- Legal action in case of defaulters.
- Secured loans put your assets at risk.
What to choose, secured or unsecured loans
In case the loans are identical, but you need to choose between secured and unsecured loans,it is a better option to choose the unsecured loan.
Choosing a secured loan over an unsecured loan should be done if:
- You require borrowing for a long time, more than five years.
- Secured loans are cheaper than unsecured loans.
- When you require to borrow a larger amount, over £25,000.
When you compare between secured and unsecured loans,secured loans have a higher risk as it claims the property if something goes wrong.
Secured and unsecured loan alternatives
Loans can solve your monetary issues, but they can be troublesome while making repayments.
So, if you want to borrow a small amount like a few thousand pounds, you can use a 0% money transfer credit card to move the funds available through it into the current account and easily borrow an interest-free amount for approximately three years.
However, you need to pay a fee, which is some percentage of the borrowed amount.
When you need a large sum, and at the same time you have a mortgage, it is better to consider remortgaging to get some cash. Mortgage rates are lower than secured loan rates.
The negative side of this is high fees, and you will need to pay interest on the amount you owe for mortgage terms.
Want the best deals on secured and unsecured loans?
If you find that a secured loan is an excellent choice for you, then you should ask your mortgage lender about the offers.
Maybe some of them will offer exclusive deals; especially, the lenders that provide better deals to those borrowers who have an excellent repaying record off their mortgage.
You can check and compare websites so you can get some better deals offered by other lenders. But keep in mind that comparison websites do not always provide a comprehensive selection.
Make sure to check the terms and conditions of every deal and what the result will be if you are unable to repay the loan.
Also, check that the deals you are comparing on a comparison website are also showing up on the credit file.
This is because some lenders carry out credit checks before giving a quote, and that may look like you have applied for the loan.
It can harm the credit rating if it happens many times. You can ask whether they provide a soft search credit check or quotation search.
Secured loans are those in which lenders keep your asset as security. The monetary value of this asset should be equivalent to or more than the borrowed amount. So, a lender needs to check its value before providing the amount to the borrower.
Whereas in case of an unsecured loan, there is no collateral involved, and thus it is a quick process as the lender needs not to check the value of security while the borrower applies for the loan.
When applying for a loan, consider all the factors discussed above to make the correct decision. You must understand the concepts clearly to avoid future troubles.
Both are equally feasible options when it comes to taking out loans, but several factors determine if a person is eligible for a particular type of loan.
Your credit score is one important factor that is used to approve unsecured loans. On the contrary, the kind of assets you hold determines the amount of secured loan you could get from a particular bank.
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What is the easiest place to get a personal loan?
Ratewise is the easiest place to get a personal loan because we help you search the market and find the best certified lender for you.
How many personal loans can you have UK?
How many personal loans can you have in the UK? That depends on your financial situation. You are certainly able to take out more than one loan if you have the financial ability to.
If you are borrowing through the same lender however, it may be simpler to consolidate your payments to make sure you don’t miss any.
What is the easiest loan to get?
The easiest loan to get is a secured loan. This is because a secured loan comes with the condition that you put some of your property up as collateral during the loan period.
What is the minimum credit score for a personal loan?
The minimum credit score for a personal loan is dependent on your lender.
With Ratewise we find you a certified lender who can work with your situation and help you build your credit score if it isn’t quite high enough to get your desired loan.