Loans: Secured or Unsecured - Which One is Right for Me?

By: Liam G

Thousands of borrowers are forced to make difficult choices about the loans they take out.

Among them is that of whether to opt for a so-called "secured" or an "unsecured" loan.

Secured loans are described as such because when you take one out you are offering one of your possessions, usually your home, as security on the loan. Pay off the loan and nothing happens. If you don't pay the loan, the lender can take your home away.

Secured loans are generally only available to homeowners, regardless of whether or not they own their home outright or are still repaying a mortgage. With unsecured personal loans, lenders only have the borrowers "promise" that they will repay the loan, and this is reflected in a number of ways.

On a secured loan, the amount still owed compared to its current value will be a big deciding factor into how much the lender will be willing to borrow.

Basically, the more equity you have in your home, the larger the loan you are likely to get. The majority of secured loans are for ?5,000 to ?50,000; in some circumstances up to ?100,000 can be borrowed.

The main worry associated with secured loans is the prospect of losing one's home. However, this isn't something that "just happens" if you fail to make a single payment. Before action is taken to repossess a home, a lender will often send a series of increasingly strongly-worded letters to the borrower as payments are missed.

If non-payment continues, the lender has the legal right to foreclose and sell the property, and this is becoming increasingly more common.

Any decision between a secured and unsecured loan depends on a number of factors. One of them is the amount required and whether or not you have any collateral. Each type of loan comes with their own set of advantages and disadvantages.

First, the maximum amount for unsecured loans is generally around ?25,000, compared to the ?100,000 for a secured loan. Higher interest rates are also a big factor as lenders have to compensate for losses from defaults, which are higher on unsecured loans.

The other big difference is seen within the repayment period, with a maximum of around 25 years for secured loans and just seven years for unsecured loans.

This longer repayment term results in lower monthly repayments, and therefore may make it a more suitable option for applicants that think they will not be able to keep up with the higher monthly repayments of an unsecured loan. But it also means you may end up paying more interest on the loan over the longer period of time.

Finally, as with any line of credit an applicant's credit rating will play a role in deciding whether they will actually get the loan and at what rate of interest.

Again, because of the lack of security, lenders will place more weight on an applicant's credit rating when considering an unsecured loan than they would with a secured loan.

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