How are secured and unsecured loans different?

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When choosing the right financing, you need to consider the differences between the many options available so that you can make an informed decision about which product is best for you. Think about whether you need to borrow a large or small amount of money, what kind of time period are you considering to repay the loan? What type of loan would be best for a homeowner or person with poor credit?

The options become much clearer when you know the differences.

A secured loan is contracted on the assumption that the borrower promises some type of collateral or asset to the lender. Most of the time, this takes the form of ownership by the borrower. Therefore, if repayments are not made, the lender has the right to take the property. With a secured loan, lenders generally offer a lower APR (annual percentage rate) because they have very little risk of losing money. If you are a customer with good credit, lenders will often offer loans that are secured at a higher proportion of the equity in the property.

Even if you have poor credit history, secured loans are easier to obtain than unsecured ones, and sometimes past issues such as county court (CCJ) judgments or arrears can be discounted to some extent .

Secured loans are best suited for people who want to borrow a large amount and want a long period of time to repay. Guaranteed loans are repaid monthly over a period of three to twenty-five years. Some lenders charge a penalty (which can be quite high) if the loan is paid off early. In all cases, you must remember that your home will be at risk if you fail to repay a mortgage or other loan that used your home as collateral. If you miss your payments, a lender will apply to the courts for your property to be repossessed, usually after you’ve missed three payments, although some lenders will do so even sooner.

Perhaps because of this risk to the borrower, it is not surprising to learn that more than 90 per cent of loans arranged in the UK fall into the category of unsecured loans. Simply put, with unsecured loans you do not have to offer any collateral to the lender and therefore there is no risk of losing your home.

This, of course, comes at a price because the lender takes all the risk and charges more to do so accordingly. The interest rates on unsecured loans are much higher and the repayment term is usually much shorter. Unsecured loans are best for people who want to borrow money for months or a few years, to buy a car, for example, or to make home improvements.

If you’ve had problems with late or unreimbursed loan or credit card payments in the past, it may be difficult to get an unsecured loan, but it’s always worth asking. In fact, many brokers specialize in helping clients who may have had previous credit problems.

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