When it comes to taking out a loan, it can be difficult to know what to look for. With a huge range of finance options available on the market, who should you turn to when you’re in need of a little extra cash? While you can turn to payday loans when facing a financial emergency, or a bank loan if you’re looking to make a large purchase such as a new car or to consolidate your other debt, knowing the difference between secured and unsecured loans is the first step in your decision-making process. Here, we’re taking a closer look at both to help you to determine which is best for you.
What Is A Secured Loan?
A secured loan is a form of finance which is held against a particular asset. For example, finance from a car purchase is a type of loan that you can take out and if you fail to meet repayments, your car is likely to be taken away. The same goes for mortgages on your house or flat. While secured loans are often available for a much larger amount than what an unsecured loan is likely to offer, if you are unsure if you are able to meet repayments then you may find that your secured asset will be taken from your possession.
What Is An Unsecured Loan?
An unsecured loan is the opposite to a secured loan and is not held against any asset that you may have. A key example of an unsecured loan is peer-to-peer loan or a payday loan from a reputable short-term loans lender. In addition to this, an unsecured loan can also encompass student loans or credit cards. You are not at risk of losing some of your possessions as collateral as a direct result of failing to meet repayments on time.
What Are The Advantages & Disadvantages Of Secured Loans?
As previously mentioned, one of the biggest benefits of a secured loan is that they are often found for a much larger amount than what an unsecured loan can offer. Typically, a secured loan will go up to around £25,000 and sometimes even larger if you’re counting a mortgage as a type of secured loan. If your credit history is making it hard to access an unsecured loan, then you may have better luck as your property will be used as collateral, making the loans easier to qualify for. Repayment periods are often longer on secured loans, too.
However, there are a few disadvantages to secured loans, with the biggest being that you are at risk of losing something of your possession if you fail to meet repayments on time every month. Further to this, there can be a number of fees and charges implemented so you should always read the terms and conditions prior to accepting the loan offer.
What Are The Advantages & Disadvantages Of Unsecured Loans?
With unsecured loans, you are likely to find that these are much more widely available and repayment periods are often far more flexible than what a secured loan can offer. With some unsecured loan providers also offering the option of a payment holiday and some of the best loan rates on the market reserved for unsecured loans, they are often the most favourable choice out of the two.
Nevertheless, due to the shorter length of time in which an unsecured loan can be paid off in, you may find that interest rates are much higher, as well as APR due to this being calculated over the period of a year. Further to this, you may find that you are unable to access the very best deals unless you have a perfect credit score, meaning you could be left with high interest rates or additional charges.
As you can see, there are lots of things to consider when it comes to applying for a loan. Weighing up your options can give you the best overview about which type of loan is best for you, depending on your existing financial situation and also the purpose of the loan.