Secured or unsecured – which loan is best for you?
When it comes to finding a suitable loan for your need there are plenty to choose from including debt consolidation loans, car loans, education loans, home improvement loans are more.
However, one of the major decision that you need to make if you are a homeowners is whether you want to take your loan out on a secured or an unsecured basis. Non-homeowners will not have this choice, as secured loans are only available to homeowners and therefore non-homeowners will have no other choice other than to opt for an unsecured loan.
For homeowners it is important to consider the pros and cons of both secured and unsecured loans before making a decision, as taking out a loan – particularly a secured one – can be a big financial commitment. There are advantages and disadvantages to both types of loan, and your circumstances and needs will help to determine the type of loan that is best suited to you.
With a secured loan you can enjoy a number of benefits. These loans offer increased borrowing power compared to unsecured loans, although the amount that you can actually borrow will depend on various factors such as the level of equity in your home (which is the value of your home minus any outstanding mortgage balance and other secured loan balances), your financial and employment status, your credit rating, and the lender’s own criteria. Often, secured loans are available to those with bad credit who may not be able to get unsecured credit. You can get some very competitive interest rates on secured loans, and because these loans offer longer repayment periods than unsecured loans you can spread your loan over a longer period, which helps to keep the repayments down.
There are also disadvantages to consider with secured loans. The main one is that these loans are secured against the home, and therefore if you default on repayments you could be putting your home at risk. Another potential problem is that if you take out a secured loan to the full level of your equity and house prices then fall you could actually find yourself in negative equity, which is where you owe more than the actual value of your property. These loans are only available to homeowners, and therefore are not accessible to non-homeowners.
There are also a number of advantages to consider with unsecured loans. Both homeowners and non-homeowners are able to apply for this type of loan, making these loans accessible to more people. Competitive interest rates and a wide choice of lenders are available with unsecured loans. One of the main benefits is that you are not putting your home or any other asset at risk if you default on repayments, although this will badly affect your credit. Borrowing levels normally go up to £25,000 depending on your financial status, credit rating, income, and other eligibility factors.
On the downside those with bad credit will find it difficult or impossible to get an unsecured loan, as the risk to the lender is too high. The lower borrowing levels mean that you are restricted in how much you can borrow, and the shorter repayments periods – usually up to seven years – mean that you have to spread your loan over a shorter period so the monthly repayments will be higher.
Tom Smith
10th November 2007
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