Secured v Unsecured Loans – A Comprehensive Guide

There is now more choice than ever when it comes to taking out a loan. Loans with short or long term repayment schedules, small or large loans, higher or lower interest rates, secured or unsecured loans… the choice is enormous.

Finding the right type of loan for your circumstances is not difficult but you need to be clear about what your personal situation is, what you plan to use the money for, how much interest you are prepared to pay and what length of time you will need to repay the total amount.

For many people, the choice boils down to secured or unsecured loans. Both have their advantages and disadvantages and you should be clear about your own situation before you start firing off applications. Remember: every time you apply for a form of credit, this will be recorded on your credit record as a search and may have an affect on your future ability to get approval for other loans.

Secured and unsecured loans come with different interest rates, different repayment schedules and some may have further fees or early redemption penalties to consider.

Secured loans

These financial products are only available to people who own their own properties either in full or with an outstanding mortgage. That means that tenants, people in social housing and – in some circumstances – people in shared ownership schemes are not eligible for a secured loan.

The main difference with a personal loan to be aware of is that by applying for one, you are offering your house as security to the lender. That means that should you fail to keep up with the repayment schedule or otherwise default on the loan, the lender will be able to start proceedings to take possession of your house. It will then be able to sell the property to recover the outstanding capital amount and any interest which is owing.

This only happens in extreme circumstances and as a last resort and it’s worth knowing that there is evidence that lenders of unsecured loans are increasingly resorting to securing charging orders on debtors’ properties when they fall seriously into arrears. This tactic effectively ties a borrower’s home to a loan which was originally unsecured when they are sufficiently in arrears for the lender to take action.

A secured loan may be easier to get accepted for than an unsecured loan because of the extra security provided in the form of a property. They also come, in general, with lower interest rates than sub prime unsecured loans. Remember, too, that even those with impaired credit who do find themselves accepted for an unsecured personal loan might end up paying significantly higher interest rates than those who apply for secured loans.

Secured loans come in all shapes and sizes with amounts between £5,000 and £75,000 being pretty standard. There are lenders prepared to consider much larger amounts – £250,000 or more – depending upon an applicant’s circumstances. The lender will be looking for evidence that you have enough equity in your house to cover the repayment of both your mortgage and the new loan should the worst come to the worst.

In general, you will also be able to choose a longer repayment schedule with a secured loan than an unsecured one with loan lifetimes of 10, 15 or even 25 years not uncommon.

Unsecured loans

Exactly what they say on the tin, unsecured loans are not backed by a property or any other form of security. The only security that most lenders will rely upon when making a decision is the applicant’s previous financial history in the form of his or her credit record.

Personal loans are usually shorter-term loans than secured ones. They will come with shorter repayment schedules and smaller capital amounts. While the security of a property usually results in lower interest rates, unsecured loans come with higher APRs – particularly when the applicant has a poor or bad credit record. That’s because the lender is taking a bigger risk in lending money to people with evidence of financial problems in the past.

Most lenders will have stricter criteria with unsecured loans compared with secured ones. That means that if you have a poor credit history, you stand a bigger chance of being rejected or, if you are accepted, will have to pay higher interest rates than somebody with a perfect record.

The sums involved are smaller than with secured loans and usually vary between £1,000 and £10,000. A small number of lenders offer larger amounts – all the way up to £25,000 – although these will generally be for people with better records of financial management. When it comes to repaying the loan, you will find that the shortest term is a year with the longest usually running to 10 years.

You probably won’t be asked too closely about what you are planning to use the money for with a personal loan and anybody who is in work and with a regular income will be able to apply. It won’t matter whether you are a homeowner, tenant, in social housing or a shared ownership scheme.

Because the market in personal lending is so large, it’s worth shopping around when you are thinking of applying for an unsecured loan. There are loans to suit most circumstances and a good place to start is one of the financial comparison sites or through an online broker with access to large numbers of lenders.

Article provided by Mike James, an independent content writer in the finance sector – working with a selection of companies including technology lead finance broker Solution Loans, who were consulted over the information contained in this piece.