Which will you be better off with?
If you're looking for a loan, deciding whether to opt for a secured or unsecured loan is your first job. This is a short guide to help you decide which option will suit your circumstances best.
Generally, when all else is equal, an unsecured loan is better than a secured loan – why risk your house should you fail to meet repayments if you don’t need to? However, in many cases, all else may not be equal:
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Finally, if you really need to borrow more than £25,000 and you are a homeowner, the only way to do this is with a secured loan or a mortgage (which is a type of secured loan).
Which is going to offer the best deal?
If you don’t have a perfect credit history, you’re likely to find that a secured loan will offer a lower rate of interest. However, if you’ve got a really good credit history and you’re borrowing less than £25,000, it’s quite likely that you will get an even a lower rate with an unsecured loan. In that case, there’s no good reason to choose a secured loan, even if you’re a homeowner. Don’t be seduced by a lower monthly repayment cost if the loans you are comparing have different repayment periods. Very often secured loans can be spread over a very long repayment period (up to 25 years in some cases). While this makes the monthly repayments lower, it also increases the total amount repayable.
The best advice is to borrow as little as possible, for as short a period as possible and with as low an interest rate as possible. This minimises the total you need to repay.
What to consider when deciding between secured and unsecured loans
You should always compare the total amount repayable when comparing any loans. Unsecured loans are generally for smaller amounts over shorter periods, therefore the total loan cost is often less, as long as you qualify for competitive interest rates and the monthly repayment is affordable for you. A secured loan often offers lower interest rates and allows you to borrow larger sums of money. But because the borrowing is over a longer period (usually at least 5 years) the total amount repayable can often be more.
Make sure you also take into account the cost of repayment insurance if you need it: insurance can add hugely to the total repayable.
What to watch for with secured loans
People quite often use secured loans to consolidate large amounts of unsecured debt into one loan in an attempt to reduce their outgoings. However, some consumers use these consolidation loans in order to keep spending, rather than as a way of getting their current debts under control. If your debts further spiral out of control after a secured loan has been taken out on your home, the result may be missed loan repayments which can lead to the lender repossessing your home. Don’t be seduced by lower monthly repayments if you’re spreading the repayment over a long time period – you’re just deferring the payment and will end up paying back more in total.
What to watch for with unsecured loans
Obtaining an unsecured loan can be very difficult if you have a poor credit history. Due to the way the typical APR structure works, lenders often refuse unsecured loans to anyone without a near-perfect credit rating. In fact, our research shows that over 85% of unsecured loan applications to some lenders are refused for this reason. This means that if your credit rating is low you may find that you are not eligible to borrow at reasonable rates other than through a secured loan; lenders may require security in return to lower the risk you present as a loan candidate, and if you do qualify for an unsecured loan the interest rates offered may be too high to be considered competitive.
Please note: this website, and the articles and information within it are based on journalistic research. It does not and should not be construed to constitute financial advice. Any information should be considered in regard to specific circumstances. All tips are followed at your own risk and should be followed up with your own research. For more please refer to our terms and conditions of use.