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Last updated: 28 October 2022
When choosing a loan, it is not just about finding the best rate, but the type of loan that you wish to take out. The two key types of loans are ‘secured’ and ‘unsecured’. Generally speaking, secured loans are used by homeowners to borrow large sums of money that is secured against their house. On the other hand, unsecured loans are smaller, personal loans
that you pay back through a pre-approved repayment plan.
This guide will take you through the advantages and disadvantages of each loan type so that you can decide which is the best for you when you begin to compare loans
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What are secured loans?
Secured loans generally speaking are loans used to borrow large sums of money, typically over £10,000. These are cheaper than other loans because the lender ‘secures’ it against a valuable asset in case you cannot pay it back.
Typically, this personal asset will be your home and this why you will often see it referred to as a homeowner loan. How much you can borrow depends on how much ‘free’ equity you have in your property, which means the difference between the value of your home and how much you owe on your mortgage.
When you compare loans, you will see this referred to as the LTV, or the ‘loan to value’ ratio. A mortgage is a classic example of a secured loan, whereby if your miss your monthly payments your home can be repossessed.
Advantages and disadvantages of secured loans
- A secured loan is generally seen as an attractive option because you can borrow with a lower interest rate as it is secured against your home.
- You not only get a lower interest rate, but they also allow you to borrow much more than a personal loan would.
- Often used by people with low credit ratings as they would not normally be able to borrow large sums of money. If you are a homeowner with bad credit history, these will often be your best option.
- With a secured loan you will get more flexibility with your monthly repayments. For instance, you have the option of much longer repayment periods which means you pay less on a monthly basis.
- There is always the risk of losing your home if you cannot keep up with the loan payments.
- It’s always important to compare loans and check their terms and conditions, because some could have early repayment penalties.
- Loans can either have fixed or variable interest rates when the repayment charges could increase.
- LTV limits what you can borrow so it might not be enough.
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What are unsecured loans?
In many ways, unsecured loans are much more straightforward. You simply borrow money from a lender and agree to pay back a certain amounts of money each month, with nothing secured against it.
There are many different types of unsecured loans including personal, guarantor, and peer to peer. They have been much harder to get in recent years but are available to a higher number of people because you do not have to be a homeowner or have large financial assets to get one.
Unsecured loans are often for a much smaller sum of money than secured loans, with the maximum typically being £25,000. When applying for an unsecured loan the best rates are often given to people wanting to pay it over three to five years. Therefore, if you are looking to borrow over a shorter period of time then you will often have to pay a higher interest rate.
Advantages and disadvantages of unsecured loans
- No risk to your property, and quicker to apply for one.
- They offer the flexibility of when and how you want to repay them. Most of the time this is between one to five years.
- Some loans will give you a ‘payment holiday’, so you don’t have to begin repaying it until a few months into the term.
- The interest rates at the lower and higher amounts of loss can prove expensive. Often the cheapest is the median amount of money, between £7,000 and £15,000.
- The best unsecured loans are usually only available to those with the highest credit scores.
- If you fail to pay or make late payments, your credit rating could be damaged. If you default on this loan then it will appear in your credit file for six years.
- Similarly, the lender can go to court to try and get their money back.a