When applying for a loan, or credit of any form, we’ve got certain decisions to make. How much do we borrow? Who do we borrow from? And how are we planning to pay it back? We’ve got several options open to us and each one has their own pros and cons; there are payday loan companies, credit cards, overdrafts, personal loans and secured loans. Each offering their own unique criteria for a loan.
Sometimes the amount we need to borrow, and what how we plan on using it dictates where we should source the loan from. For example, if we only need a loan of $100 to get us by until pay day then perhaps a payday loan is the right way to go. Do we need to do some general home improvements that could cost over $10,000? Then a secured loan against our home may be the best option. This could then allow us to extend our existing mortgage for a year or two rather than take out additional debt with a new provider, and risk paying a higher rate of interest.
But what about everything in between these two loan types? An average personal loan is one around $1000 to $2000, an amount too high for a payday loan and far too small for a secured loan. When looking for an amount like this, a personal loan is usually the best option, this kind of loan is also referred to as an unsecured loan.
Secured and Unsecured Loans
As far as terminology goes unsecured loan’ sounds like a negative thing, it almost implies a lack of safety net or risk. After all, the word secure means safe, fastened and kept in place’, so we can understand why the term causes trepidation in those who hear it for the first time. If we’re being honest, we’d use a different choice of words! But the terminology has been around for decades and is too ingrained in our financial culture to rebrand now. However, the term personal loan’ is gradually replacing the term unsecured loan’, although they generally mean the same thing.
It’s also important to point out that from a risk point of view, failing to pay a secured loan can have much more dire consequences in the long term than failing to pay an unsecured loan. Not paying an unsecured loan back on time can result in a negative credit rating, charges and loss of reputation. Failing to pay a secured loan can result in your home being repossessed.
So, what’s the difference between the two?
Secured Loans
Well a secured loan is one that’s tied to your house. It becomes part of the mortgage or a second mortgage if you will, and failure to pay it can lead to the bank taking the house back. After all, a home is never truly yours until the mortgage is paid off. Secured loans work this way too. They also tend to be higher amounts of money than other loans and the rates of interest tend to be the lowest around.
As those who have a mortgage and own their own homes have assets to their name, such as the property itself, the lender is confident that they will be able to pay back the loan. The recipient is seen as a reliable choice of customer, if they already have a mortgage with the same provider then they may have already demonstrated their reliability over the years. If this proves to be false over time, then they can recoup their losses by repossessing the home. So essentially the term secured loan’ means the money is secured against the house.
Unsecured Loans
An unsecured loan simply means it isn’t secured against the customer’s home. The customer is putting up no collateral and the loan is purely based on their credit score and demonstrable ability to pay it back over a pre-determined term. Their interest rates may be slightly higher than secured loans, but they tend to be fixed rates meaning the interest will stay at the rate agreed when the loan was taken out. This can also be the case with unsecured loans, especially today, but variable rates are still something that can effect secured loans. This is when the interest increases or decreases depending on the market’s fluctuations.
Anyone can be approved for an unsecured loan, where only homeowners can be granted a secured one. Credit cards, overdrafts and payday loans can all be considered unsecured debt, although they aren’t considered personal loans per se, as each typically uses their own unique system.
There are pros and cons to both types of loan, the terminology of secured and unsecured is not classified by any form of positive or negative comparison, the terms are just statements of fact. Each simply has a different purpose and target audience. One is not better than the other, just suited to different scenarios.
Payday Loans Scale
What are the benefits to an unsecured loan?
- Unsecured loans are generally easier to get. Most banks offer them as do many FCA approved loan companies in the US.
- They can be used to fund pretty much anything the recipient wants, from holidays, cars to consolidation of existing debts.
- They usually have a fixed rate of interest, meaning the payments will never go up throughput the course of the loans term. However, this means they also won’t go down either.
- No collateral or assets are required for the lender to approve the loan.
- The range of loans on offer is vast, varied and flexible.
- They can be repaid back early in most cases if the customer has a sudden windfall.
When applying for an unsecured loan also search for the term personal loan, as they tend to be the same type of product. It’s also important to make sure that the lender you choose is officially recognised and approved by the FCA (Financial Conduct Authority). This means they are operating ethically and responsibly and have obeyed the US’s financial laws and maintained a high standard when trading with the public.
Finally, it always pays to look at the customers score on websites like TrustPilot.com too. These will all be legitimate reviews from verified customers and their comments can give you an insight into how the company operates. As well as give the organisation tips on how to improve their service and products.