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 plan. This guide will take you through the advantages and disadvantages of each type so that you can decide which is the best for you when you begin to compare 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 an asset in case you cannot pay it back. Typically, this 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 payments your home can be repossessed.
In many ways, unsecured loans are much more straightforward. You simply borrow money from a lender and agree to pay back a certain amount 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 term then you will often have to pay a higher interest rate.
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