Borrowing money can be a confusing business, especially with the multitude of different products on the market. Today we're looking at what you need to know about secured and unsecured loans.
A secured loan is available only to people who own a property with a certain amount of equity in it – so they’re often referred to as ‘homeowner loans’. Understandably, banks are more willing to lend money to people who have a valuable asset, such as a house, to offer as security. They will usually insist on this if you want to borrow a large sum – say £25,000 or more.
The big advantage of a secured loan is that it is often offered on more generous terms. Generally a secured loan will have lower rates of interest and your repayments will be spread over a longer length of time– because it is less of a risk to the lender.
On the downside, it is less of a risk to the lender because, if something goes wrong and you default on the loan, they can take your house. Lenders usually prefer a secured loan to be taken out over a longer period of time – perhaps as long as 20 years or more - as they cost more to set up.
In fact, if your credit history is less than perfect, lenders may insist on any loan you take out to be secured.
Unsecured loans are more suitable for smaller sums of money (up to £5,000 or so). They are available on variable terms to borrowers with decent credit scores. If you fall into this category, then shop around – there is a bewildering jungle of lenders and loan products out there.
However, if you’re looking to make repayments in a short space of time, you’ll find often find the interest is higher. You’ll often find the best deals on interest are for borrowers looking to make their repayments over three to five years but it’s always worth checking with your lender first.
It’s also worth pointing out that in some cases lenders of unsecured money can have a claim on a proportion of the proceeds of a house sale, if times get really tough. This is not inevitable and, furthermore, courts do not always agree to impose a repossession order. But it’s important to realise that taking out an unsecured loan has consequences too, if your circumstances change and you can’t keep up with the repayments.
Before you take out any loan, it is essential to read the terms and conditions thoroughly and compare the fees and charges involved. Some lenders, for instance, will impose a fee if you want to pay the loan off early. Doing your homework and weighing up the various products on offer is a sensible precaution that can save you a lot of money.