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What’s the difference between secured and unsecured loans?

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Are you looking for a loan, but aren’t sure whether you need a secured or an unsecured one? If you’re unsure, or simply need a little more clarification, the following will help to guide you.

SECURED LOANS

A secured loan lets you borrow money against an asset you own, typically a home, automobile or even jewellery. Such loans are primarily obtained to borrow significant sums of money, usually more than £10,000. However, the general practice is to borrow from £3,000 and onwards.

The term secured itself refers to the lender’s security to possess your asset if you default on loan repayments. This tangible security makes such loans a low-risk option for lenders and therefore, the interest rates offered are low. Alternatively, a secured loan is a risky business for the borrower as irregular repayments can result in your possessions being taken away.

All of the following loans fall under the ambit of secured loans:

  • Homeowner or home equity loans
  • Second charge mortgages or second mortgages
  • First charge mortgages (In the event of no ongoing mortgage)
  • Debt consolidation loans (not all such loans are secured)

Some of the secured loans have variable interest rates. Therefore, your monthly payments may go up north or down south depending upon your terms of credit. It is admissible to be clearheaded about the fixed or variable interest rate and the ensuing implications on your monthly instalments.

It is critical to remember that some secured loans can have premium arrangement fees and other related charges. Therefore, always factor in the total cost of borrowing funds before submitting that glossy loan application. It should be noted that set-up costs and arrangement fees must be included in the APRC (Annual Percentage Rate of Charge) – which can also be used to compare products.

You also need to meet certain criteria when applying for a secured loan, which will vary depending on the broker. For example, the application requirements for the loan provider www.opalloans.co.uk/ are as follows:

  • You must be 25 years or older
  • Earn a gross annual income of £15,000+
  • Be employed and own a home
  • Not be bankrupt
  • Not have missed any payments on your mortgage (in the last year)
  • Have no CCJ’s (in the last year)

Most brokers will follow similar requirements. Ensure you check them out before applying.

UNSECURED LOANS

Unsecured loans are straightforward in nature. You borrow funds from a bank or another lending institution against an agreement to make regular payments until the principal and the interest, if any, is paid in full. However, the interest rates incline to be on the higher side as the loan is not secured on your home or any other valuable asset.

Nonetheless, if you default on your payments, you could incur additional charges, which in turn can hurt your credit score. Moreover, the lender can also opt for a legal recourse to reclaim their money which may include requesting a charging order on your property – although, such terms must be negotiated before inking the contract.

Typically, customers in the UK cannot obtain more than £25,000 with an unsecured loan and must repay the same in the region of five years.

When comparing various secured loans online, always check if it will show up on your credit file. Some creditors will conduct a comprehensive credit check on you before offering a quote, which may appear as if you have applied for the loan. If this happens frequently, it can harm your credit score.

Lastly, in the case of a complaint the first point of contact should be the lending institution followed by the Financial Ombudsman Service, if the former does not respond within eight weeks.

 
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