Although applying for a loan should just be finding the cheapest option out there, this isn’t’ the case. Getting the lowest interest rate is a top priority, but there are other factors you also need to think about.
One of these factors is the type of loan you want; either secured or unsecured. In this article, we will be discussing what secured and unsecured loans are and the difference between them.
What is an unsecured loan?
As questionable as it may sound, an unsecured loan is much more uncomplicated.
An unsecured loan allows you to borrow money from a financial institution without securing it against an owned asset.
You agree to make regular payments until you’ve paid back the entire loan, including any interest, and that’s that.
However, where you don’t attach an unsecured loan to any belongings, the interest rates will be high. Also, the lender can charge you additional fees if you fail to pay on time. If you’re unable to pay these fees, plus the full loan amount, the lender then has the full right to take you to court.
If they win the court case, they may be able to take certain belongings from you to cover the costs that they’ve lost. For instance, your biggest asset, which is usually your home. However, it doesn’t stop there. They can also take possession of other valuable items that you may have ownership of, like your car, jewellery, and anything that holds value.
What is a secured loan?
With a secured loan, you’re able to borrow a more significant amount of money than you can from an unsecured loan.
A secured loan allows you to borrow money from a bank whilst using an owned asset as collateral.
Typically, you’re able to apply for loans from £10,000+, although you can borrow less. This is because the lender knows their money is secured and will get it back one way or another. It means that you’ve attached something worth the same or more than the value of the loan. This is normally a house.
If you fail to pay back your debts, they have the legal right to repossess your home/ other valuable belongings. The reduced levels of risk associated with these types of loans result in much cheaper interest rates.
For you, the borrower, they are considered riskier. Should you miss that payment, you may have to sell your assets to cover the costs. However, if you know how to budget and manage the monthly repayments, you’ll receive a cheaper loan interest rate.
What is the difference between a secured and unsecured loan?
In simple terms, a secured loan is funds that you’re able to borrow as long as it’s protected by an asset you own – typically a home. With a secured loan, the interest is much cheaper than an unsecured loan due to the reduced risk that is taken by the lender. However, because you tie an asset up with the loan, the secured loan type can be considered riskier than an unsecured loan.
All in all, each loan can be beneficial depending on the individual’s circumstances. If you are financially stable but just require some extra cash, it may be a better option to go ahead with a secured loan if you’re positive you can make the payments.
James Banerjee is an Account Director who graduated from the University of Kent in 2014. He works in SEO on clients such as HSBC UK and Nestle and he has a keen interest in personal finances and money-saving advice.