Loans are taken out when you need additional finance to pay debts, or to ensure you can afford a necessary purchase. But if you’re considering taking out a loan, you need to be aware of the different types of agreement. Broadly this will fall into two categories: the secured and unsecured loan – below, we explain the differences between the two.
What is a secured loan?
This type of loan allows you to borrow a larger sum of money with more benefits, because you put an asset (a house or a car) as guarantee. However, the risk is that in case of non-payment you will lose the property.
Advantage one: longer terms
With a fixed asset held against your loan, you’ll be able to spread the repayment out across a longer period. Nevertheless, the longer the terms the more interest you’ll be likely to pay.
Advantage two: lower rates
As the loan’s secured against your property, the lender will be more confident about your ability to repay. As such, the rates of the loan will be lower than for an unsecured loan.
Advantage three: larger sums
For similar reasoning, you’ll be trusted to loan larger amounts of money given the confidence surrounding secured loans. As the lender is able to repossess your home in the event of a failure to repay, they’re happier to provide you with more funds in the short term.
What is an unsecured loan?
This type of loan is less risky, as it allows you to borrow a sum of money without using property as collateral. However, the amount borrowed will be smaller and the interest will be higher than with a secured loan.
Advantage one: lower risk
With this loan, your property won’t be at risk. The lender won’t have the ability to force you to sell off your home for repayment. Therefore, you can quickly borrow money here without putting a key asset on the line.
Advantage two: flexibility
Repayments here are often flexible. You can select from a range of fixed payments from one to five years, and some may offer a payment holiday of one to three months at the start of your agreement.
Which one is best for you?
It depends on the amount of money you need, your revenue and if you already have a property you can put as a guarantee for the loan. It'll also depends on what you wish to do wish with your loan – be it buying a house or repaying debt. Ultimately, a homeowner secured loan can offer you a wide variety of terms, while unsecured loans can be less risky.