Secured versus unsecured loans – what is the difference?

If you are browsing websites such as ours, the chances are that you are looking for a credit or loan product of some kind. Over the past decade, credit and loan products have exploded onto the financial market in the United Kingdom. Many of these offer excellent loan options, but some, from more unscrupulous loan providers, are often filled with costs and penalty fees, all carefully hidden away in the fine print.

If you are unsure where to even begin, perhaps the best place is to determine the difference between the two major loan types available – secured and unsecured loans. In this article, we will be trying to show you the major differences between the two and help put you in a more informed position should you ever be faced with the choice.

Secured loans

A secured loan can be sourced from various financial institutions throughout the United Kingdom. With this type of loan, you will need to offer up something of value to act as security against the loan. For example, perhaps your car, your house or even some extremely valuable item such as jewellery. Whatever you choose will be the collateral on the whole loan agreement while it will also directly influence how much money you can borrow based upon its value.

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As an example, a logbook loan allows you to make use of your car as a form of collateral. Here, lenders will normally give you a loan up to 50% of its value. This can even be applied to your home (for bigger loans). This collateral is important because the lender has every right to sell it off and recover their costs should you stop paying your loan instalments every month.  Of course, the loanee can still make use of whatever was offered as collateral be it a vehicle or even a house.

With secured loans, amounts borrowed are usually far higher than an unsecured loan, mostly because of the fact that the collateral offered generally has a lot of value. It is important to take note of whether the lender will offer a fixed or variable interest rate while the loan itself is normally paid back over a far longer period than an unsecured loan option, but at a far lower interest rate.

Unsecured loans

Unlike with a secured loan, there is no need to offer collateral if you opt for an unsecured loan. These loan options will mostly be for far smaller amounts and be set for both a fixed interest rate and a certain term. So in other words, you will have a specific amount of time to pay off the agreed loan while loan payments will be the same in the first month as they are in the final month due to the fact that the interest rate can never change, no matter what happens to the prime banking interest rate.

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Unsecured loans are often taken out in times of emergency for example, a burst geyser that needs fixing, an unscheduled visit to the hospital or something similar. Note that representative APR rates for these loans are extremely high. This is because the lender does not have any form of collateral to fall back on should you not pay each month.

Keep informed

Many times, the amount of money that you want to lend can go a long way to determining the type of loan that you should try to apply for. This isn’t always the case, however. For example, should you own a vehicle, you could secure a logbook loan across a range of amounts, usually from £250 up till £50 000.

The thing is, it pays not to just jump into the first deal you come across. We understand that during an emergency you need money in a hurry but make sure that you are looking closely at any contract that you sign, particularly when it comes to the fine print. Always confirm the interest rate – both the amount and whether it is fixed or not, the exact amount you will be paying back as well as the loan terms.