Email to a friend

Secured Loan or Unsecured Loan?

Many of us will take out a loan at some point of our life, whether it is for a new car, holiday, home improvements or debt consolidation.  Unsecured loans are the most popular form of borrowing for relatively small amount over a short term, but for larger borrowing secured loans are an option.

With secured loans the amount you are borrowing is secured against an asset, most commonly your home.  As the lender has security that the loan will be repaid, cheaper rates can often be found with secured loans compared with unsecured loans.  You should still shop around, as not all secured loans are cheaper.

You can usually borrow more over a longer term with a secured loan.  Typically you can borrow up to £100,000 over a term of up to 25 years.  However, as you are borrowing over a longer term you will be paying more in interest.

However, as the name suggest, you are putting your assets at risk if you cannot repay the secured loan.  If secured against your home, you could lose this if you fall down on repayments.

Secured loans are usually offered at a variable rate.  This means you cannot predict what your monthly repayments will be over the term, as if interest rates rise, so will the amount you repay.

With unsecured personal loans you often pay higher rates, as the lender has no security.  Most loans quote a typical Annual Percentage Rate (APR) and this is often dependent on your credit rating, so it is a good idea to check the actual rate you are offered is a competitive one.  Some personal loans are available on a fixed rate which means you know exactly what your monthly repayments are going to be.  This can prove helpful when trying to budget.  Unsecured loans are usually taken out over one to five years for amounts from £1,000 to £25,000.

Which type of loan you choose really depends on your circumstances and needs.  A moneyfacts.co.uk user poll revealed that 45% of people would secure a loan against their home for a cheaper rate.  As stated earlier, rates vary greatly on personal loans and so prices should be compared, as some unsecured loans are cheaper than secured ones.  The main factor to think about is that you can end up losing your home or other assets if you struggle with repayment on a secured loan.