There can be little doubt that submitting a successful loan application leads to a major financial commitment. By their definition, loans have to be repaid and by taking a loan out, you will be guaranteeing to give up a portion of your income each month until the loan is repaid with the threat of serious consequences should you fail to do so. If you have decided that you need to apply for a loan, there are a few decisions to be made, not least, which type of loan should you apply for? There are two main types of loan: secured and unsecured. Each with their own unique advantages and disadvantages, they can both offer a solution to your financial problems but to find out which is best for you requires a little more information.
What is a Secured loan?
Basically, if a loan is “secured”, it means the balance of the loan secured against something you own (your house for example) – and failure to repay the loan could result in you having to forfeit this asset so that the lender can sell it to recoup their losses. Whilst the asset used by many borrowers is their home, you are usually free to use something else which is of a high value, such as a car. Because of the reduced risk to the lender, secured loan providers are generally far more flexible about whom they will lend to due to their ability to claim their money back if the borrower defaults. This means that they will often consider lending to individuals with a history of CCJ’s, defaults and poor credit. One aspect of a secured loan to factor into your thinking is that they tend to be particularly inflexible when it comes to early repayments. This essentially means that even if you can afford to pay your loan off at an early date, you are unlikely to be able to do so. The amount you are able to borrow through a secured route is likely to be decided based on your current equity in the value of the asset you offer as security, your ability to make repayments and your current circumstances (employment, living arrangements etc). This information will also be factored in when the APR is being decided as well.
What are the Advantages of a Secured Loan?
Secured loans offer a couple of significant advantages. These include:
Amount Available: The amount available along with the repayment period generally far exceeds their unsecured counterparts. Because the lender knows they have a significant asset as backup, there is far less uncertainty regarding their ability to get all of their money back.
Relaxed Lending Criteria: Even if your credit history is less than perfect, you still have an excellent chance of applying for a secured loan. Your secured asset will reassure lenders that they are able to get all their money back. However, it is important to understand that if you currently have any type of debt problem, taking out further lines of credit could prove to be a bad idea.
Is a Guaranteed Loan an Unsecured Loan?
Opposite to the secured loan, an unsecured loan does not require you to secure anything against the loan – the lender solely relies on your contractual obligation to repay the outstanding balance. Unsecured loans are widely available and are often used for borrowing lower amounts over shorter loan terms. Because there is nothing to safeguard the repayment of the loan the lending criteria are often far more stringent. Lenders generally use a risk based criteria to decide who they will lend to and what rate of interest a particular individual will be charged. If you have had credit problems you may find a loan with a guarantor is more readily available. However there are also personal loans available without a guarantor.
Interest rates are generally fixed during the duration of the loan ensuring that borrowers can budget accordingly. They also tend to me far cheaper than secured borrowing due to the fact that they are often repaid over a much shorter period of time. However, you should always compare actual cost estimations just to make sure you’re getting the best deal. The lending criteria imposed by unsecured loan providers is generally much tighter than those who offer secured loans: lenders generally charge an interest rate which is based on the credit history and income level of the loan applicant.
What are the Advantages of an Unsecured Loan?
No Risk of Losing Property: Lenders are not entitled to repossess your belongings if you struggle to keep up with unsecured loan repayments. They are of course able to pursue this in court if necessary.
Cheaper Option: When compared to credit/store cards, the associated APRs of unsecured loans are generally significantly lower. Credit and store cards usually have very high interest rates, so if you’re planning on repaying over a few months, an unsecured loan can save you a substantial amount of money.
There is no standard right or wrong answer as to which loan is best for you. Both loans have distinct differences and advantages meaning they are particularly well suited to certain circumstances.
To read more about both secured homeowner loans and personal loans in more detail visit Solution-Loans.co.uk
Amanda Gillam is Solution Loans's General Manager and has been since 2009. She is also a prolific writer on personal finance issues, and has been quoted numerous times in articles published on 3rd party websites and in press releases. Her...Read more about Amanda Gillam