Unsecured loans vs secured loans

When deciding to take out a loan there are so many factors to consider, and the last thing you want to do is dig yourself into a hole of debt you can’t get out of. Overall, there are two main loan types – secured and unsecured for personal or small business purposes.  These loans are two very different beasts, and knowing the difference between them is vital before you make any final decisions.

What is a secured loan?

This loan is sometimes referred to as a ‘home-owner loan’ and defined by the fact that debt is linked to the borrower’s property. Secured loans are therefore only available to people who own or are wanting to buy their own homes, and can be used to borrow amounts from £5,000 to much larger amounts.

However, there are certain factors which determine how much money you may borrow, as well as the interest rate offered. These include your personal circumstances and the amount of ‘free’ equity you have in your property.

But what is ‘free’ equity? It’s basically the difference between how much your home is valued for and the amount you owe on your mortgage if you already have one.

Pros of secured loans:

  • Available for much larger amounts than personal loans
  • They can be easier to qualify for, as your property acts as security
  • Easier repayment plan with a longer payback period

Cons of secured loans:

  • If you are unable to keep up your repayments, you could risk losing your home.
  • Check the terms and conditions for fees such as early repayment penalties as they could increase the cost of borrowing.

What is an unsecured loan?

Unsecured personal loans are available to people who have at least a fair credit score, and unlike the secured loan you do not have to be a home-owner to apply. This loan can be used to borrow anything from say £1,000 to £25,000, but usually amounts are usually below £15,000.

There are also unsecured cash loans for small businesses which function on the same basis, however the amount allowance increases. To avoid paying exorbitant interest amounts and fees, it is also advisable to check the terms and conditions for fees, such as early repayment penalties.

Pros of unsecured loans:

  • Unsecured personal loans are widely available to many people.
  • Flexibility to choose repayment period
  • Payment holiday often offered of 2/3 months at the start of the agreement.
  • Pay a higher interest rate to borrow over a shorter term.

Cons of unsecured loans:

  • The interest charges can be tremendously high
  • The best deals are only open to those with nearly perfect credit scores.