If you’re looking into your loan options, you may have come across the terms ‘secured’ and ‘unsecured’ loans. While you may already have a good idea of what these are, you might not have considered all the pros and cons of each.
So before making a loan request, it may be a good idea to think about which option is best for you, and weigh up the advantages and disadvantages. Which type of loan you opt for will depend on the purpose of the loan, as well as your individual circumstances.
The most common example of a secured loan is a mortgage. With a mortgage, you secure the value of the loan against the value of your property. Essentially, with a secured loan, you need to have an asset that acts as collateral against the loan.
Other examples of secured loans include car and vehicle loans, where you’d use your vehicle as collateral. Peer-to-peer loans also tend to be secured - they are often taken out by businesses, borrowing from another company or individual and securing the loan against the value of their business.
The main thing to keep in mind with these types of loans is that there is a risk that you could lose whatever you are using as collateral, if you fail to keep up with the repayments of the loan.
As you can probably guess, an unsecured loan is the opposite of a secured loan - you don’t need any assets to secure against the loan. Many personal loans are unsecured, as are pretty much all types of short term loans, which include the following:
As you’re not putting anything up as collateral with an unsecured loan, there is no risk of you losing your valuable property. This does of course mean there is more of a risk for the loan provider that lends to you though - they’ll have no security should you be unable to repay the loan.
Let’s start with the downsides of a secured loan. As mentioned above, there is a risk with a secured loan that you could lose your assets if you default on the payments. This is why you should carefully consider whether this type of loan will be affordable, and have a contingency plan in place in case anything were to change in your situation.
The main benefit of a secured loan is that because the lender can repossess your collateral, the interest rates tend to be lower than with unsecured loans. This will be dependent on how much you borrow and how long you take the loan out for, but generally the APR is lower with secured loans.
In terms of APR, this stands for Annual Percentage Rate, thus is the amount of interest you’d pay on a yearly basis. As most secured loans are taken out over a number of years, this figure will be relevant, but it may be less so with unsecured loans, as these are often short term, and won’t be borrowed for more than a few months.
You can probably guess that the main disadvantage of an unsecured loan is that the interest rates can be higher. There’s less risk for you, and more for the lender, so the interest rate generally reflects this.
When it comes to the benefits of unsecured loans, not only is there no chance of you losing any collateral, these loans are often more accessible than secured loans. In order to take out secured loans like mortgages, you almost always need a high credit score, and with other secured loans, you must have collateral already. But with an unsecured loan, bad credit histories are often considered, and you don’t need any assets to act as collateral.
The eligibility requirements for unsecured and secured loans will vary depending on the lender, but most will ask that you at least meet the following basic criteria to enquire about a loan:
If you don’t meet these three criteria, it’s unlikely that you’ll be able to request any type of loan, though some lenders do offer loans for unemployed people if they are in receipt of another form of income.
To take out a secured loan, you often need to have a good credit history. However there may be lenders that specialize in bad credit secured loans - you simply need to make sure that they are reputable lenders before making a loan request.
In terms of unsecured loans, you may be able to take out these loans even with a low credit score. Many unsecured loan providers will focus on factors like your employment history and your monthly expenditure, in addition to your credit history. It should be noted though, that if you have recently filed for bankruptcy or insolvency, you may find it more difficult to take out any form of credit, from secured and unsecured loans to credit cards.
Your credit score can impact the type of loan you can access, but it is good to bear in mind that you may be able to rebuild your credit score by borrowing. If you’re able to make repayments on time or early, you’re demonstrating to lenders that you can manage your money well, and when your credit score is calculated, this could boost your score.
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