Choosing between secured loans and unsecured loans needn’t be a daunting process. Like most things, it’s primarily a case of considering your needs and preferences. After which, you’ll be in a much better position to determine which of the two options is more appropriate for you.
What Is a Secured Loan?
As the name suggests, secured lending, is more secure as the loan is advanced when a formal legal charge is entered over an asset. In order to qualify for a secured loan, you need to offer property or other assets of an equal or greater value than the total costs of the loan – something of an insurance policy for the lender. Lenders have their own unique policies on qualifying assets – everything from homes to vehicles to jewellery and other expensive items.
If the loan is repaid in full and on time, the ownership of the assets is retained by the borrower and the charge removed. If the borrower defaults on the loan, the assets could become the property of the lender and potentially sold to cover the outstanding loan balance.
Credit history, credit score and affordability are also important factors in the underwriting and granting of secured loans.
What Is an Unsecured Loan?
Unsecured loans are issued solely on the basis of credit history and financial status. Both of which will determine how much you are able to borrow, the interest rate attached to the loan and so on. No security is required – it’s all about your financial history and current financial position.
In the event that you default on an unsecured loan, the lender has no direct right to take ownership of your assets. However, they can seek to recoup their losses and expenses through the courts.
Differences Between Secured and Unsecured
Determining which of the two makes most sense for you is all about weighing up the pros and cons.
For example, you could argue that a secured loan is riskier, given the potential to lose your assets if you run into difficulties. Nevertheless, a secured loan can be significantly cheaper and easier to apply for and obtain. Particularly if you have a poor credit history, a secured loan may be the only realistic option on the table. As long as you can cover the total value of the loan with qualifying assets as required by the lender, have acceptable credit and affordability, there’s a strong chance you’ll be considered eligible for a secured loan albeit the interest rate charged will vary depending on circumstances.
Secured loans can also be significantly faster to organise and access than unsecured loans.
That said, unsecured loans are the preferred option where smaller sums of money are needed. For example, if you intend to borrow less than £10,000, you may find an unsecured loan easier to obtain. In addition, an unsecured loan can attach low rates of interest – if you have an outstanding credit history. And of course, there’s no risk of losing your assets if you run into difficulties along the way, as you didn’t secure the loan on your property.
Which One Is Right for Me?
Back to the million-dollar question – which should you go for?
As usual, it comes down to a combination of your requirements and your personal preferences. If you have a poor credit history, you’re unlikely to qualify for an unsecured loan. If you don’t own any qualifying assets, you won’t be eligible for a secured loan however if you’re looking to borrow a small amount, unsecured loans may be preferable. If you need a larger sum to be repaid over an extensive period of time, secure lending is the way to go.
As there’s much to be considered, it’s advisable to discuss the available options with an independent broker. Rather than taking your case directly to a specific lender, talk to an impartial expert and work out the best way forward to suit your preferences and your pocket. – UK Property Finance