If you’re thinking of taking out a personal loan, there are two major types of loans you should know about. Most loan deals available in the market either fall into the secured or unsecured loan category. If you want to know which type is right for you then knowing the difference including each type’s pros and cons is the key. To help you make the right decision, below is all you need to know about secured and unsecured loans.
What are secured loans?
Secured loans are personal loan deals that require a security or collateral. It can be your home, car or any other acceptable asset. Your loan is tied up to the said asset allowing you to borrow larger loan amount usually between £1,000 up to £100,000 or more depending on the value of your collateral. It also follows that repayment terms are longer starting from one year to 25 years.
Among the most common types of personal loans that fall under the secured loan category include mortgage loans, home equity line of credit, auto loans and savings account loans among others. With this type of loan, your lender holds the asset as security. If you’re going to use your car as security, for example, the lender keeps your logbook document. In the event of non-payment, vehicle repossession is always a possibility.
While more risky on your end, secured loans is the best choice if you’re looking to borrow a larger amount. Another chief advantage with this type of loan is the lower interest rate. Since there’s a security involved, the risks are lower on your lenders hence the lower interest rates.
What are unsecured loans?
Unsecured loans, on one hand, are loans that do not require any collateral or security. In other words, it’s the opposite of secured loans. With these types of loans, processing is fast and approval is easy. There are just a few downsides. One, loan offers are smaller usually between £1,000 up to £25,000. Two, interest rates may be higher considering that lenders take greater risks when offering unsecured loan deals.
Among the most common types of unsecured loans available in the UK include credit cards, personal lines of credit, personal signature loans and payday loans specifically offered for people with bad credit. For these loans, lenders rely on your ability to pay based on your proof of steady income and other financial resources if applicable. In some cases, the lender may be open to accept a guarantor provided that said guarantor has good credit and has a steady stream of income.
Which is right for you?
To know which type of personal loan is right for you, you’ll need to look at your needs and financial circumstance. If you have good credit and has an asset to offer as collateral, then getting a secured loan is ideal especially if you need a larger loan amount. Remember though that processing and approval may be more complicated than unsecured loans.
On one hand, if you’re looking for a quick cash solution to your financial needs such as overdue bills or car repair, an unsecured loan is a sound choice. Some unsecured loans, for instance, can be processed within the same day you applied. Just remember that interest rates are also usually higher than secured loans. Secured loans are also ideal for borrowers with bad credit and who can’t get a personal loan elsewhere. Unsecured loans such as payday loans, for example, do not require borrowers to have good credit hence super easy to get approved for.