What are Unsecured Loans?

Written by Karen Bryan

£10 and £20 notes alternative 240The differences between secured and unsecured loans are important to understand before you take out any kind of credit. There are of course both advantages and disadvantages of each type of loan, and there is no one-fits-all solution for what will be the best for you.

Secured Loans

A secured loan may also be named “homeowner loan” because you borrow the money against the value of your home. The amount you are allowed to borrow will depend on how much your home is worth and how much equity you have in it. The reason they are referred to as secured is because the lender has security when it comes to getting their money back if you can’t repay it. This means that you can lose your home if you are unable to keep up repayments.

Advantages

The main advantage of homeowner personal loans is that you are often charged a lower rate of interest. This can of course result in lower monthly payments. You are also likely to be allowed to borrow more money and can do so over a longer term, because there is no risk to the lender. If you own a property, this might be the easiest loan to qualify for, owing to the fact that there is no risk to the lender.

Disadvantages

The decision to take out a secured loan should not be taken lightly. If you have any doubt over whether you will be able to keep up with repayments, it’s probably too much of a risk. Do bear in mind that interest rates can go up, resulting in borrowers having to make higher monthly repayments.

Unsecured Loans

Most people are able to borrow money on an unsecured basis; you don’t need to own your home. Whether someone will lend to you, how much you can borrow and what rate of interest you are offered will depend on your credit history. However, some lenders will consider allowing you to borrow money even if you have negative equity in your property or have a poor credit history.

Advantages

There is no need to own your own home or even have a great credit rating to borrow. Should you be unable to make your repayments, you won’t lose your home, although there are other consequences. These loans are usually paid back a lot quicker, which can offer some peace of mind about being debt-free in just a few years.

Disadvantages

The rates of interest are usually higher because of the increased risk to the lender. The term of the loan is also usually shorter. For example, you may borrow the money over three to five years rather than twenty or thirty years. This of course means that the monthly repayment rates are higher.

How Do I Decide?

Before you embark on borrowing any money, you should always sit down and work out how much you can afford to repay each month. Then read up on all the options and decide which one is going to be best for you. If you don’t own your own home, you will need to go for the unsecured option. You should always be aware of the alternatives as well. For example, if family members will lend you money interest-free, this is an option. It is also possible to have credit cards that are interest-free for a certain amount of time. If you have savings, use this before borrowing, because the amount of interest paid on your savings won’t be anywhere near as much as you will pay to borrow the same amount.