The Battle of the Loans - Secured vs Unsecured

You've decided you need to borrow money, so where do you start? There are so many different loan providers around that navigating your way to the best deal can be a bit daunting. Before you even begin to look at interest rates and repayment schedules you first need to distinguish between the two different types of loan available, secured and unsecured. We explain the difference....

In the right corner its secured loans

Secured loans require you to put forward collateral before you borrow (usually your house) as a guarantee that you will repay the loan. This usually means that they are more generous in the amount you are able to borrow and the time period over which you are able to repay the debt. While you need to be a home owner to take out a secured loan, you needn't own your house outright as most providers will enable you to borrow an amount equal to the equity you hold in the property, although some will even lend beyond this if you have a good credit history.

Secured loan providers tend to be more flexible about who they will lend to primarily because they have the backup of claiming back your collateral if you default, This means that they will often consider lending to individuals with a history of CCJ's, defaults and poor credit.

While this is all well and good, secured loans aren't usually the best option to go for whatever your circumstances. Firstly, if you default on repayments the loan provider is perfectly within their rights to reclaim your home, which is obviously not a particularly enticing proposition.

Secondly, secured loans tend to work out much more expensive than the unsecured variety as they not only tend to attract higher rates of interest (especially if you have a less than perfect credit rating) but also because repayments are often spread out over a much longer terms you end up paying a phenomenal amount back in interest.

Finally, secured loans do tend to be incredibly inflexible with few allowing overpayments or early settlements, this means that even if you could afford to pay off your loan early you are unlikely to be able to do so.

The amount you are able to borrow through a secured route is likely to be decided based on your current equity in your home, your ability to repay and your circumstances, this is likely to affect the interest rate you are charged too.

In the left corner, unsecured loans

Unsecured personal loans do not require you to put forward collateral when you borrow, instead lenders rely on your promise (albeit it a legal one) that you'll pay it back. This means that the risk of your property being repossessed if you are unable to repay is minimal.