Secured loans can be used for any purpose, typically debt consolidation
or home improvements. However, since the loan is being secured
over your home, many short term uses will inappropriate. While
borrowing against your home to invest in home improvements may
make sense, borrowing against your home in order to buy groceries
and pay your day to day bills would not be so appropriate. Secured
loans, as well as being possibly larger than unsecured loans,
will also be likely to have better terms and rates. A lender should
be more willing to give you a lower interest rate on a secured
loan because his risk is less. Should you default on the loan,
he can move in on the house, and sell it. He is therefore, virtually
guaranteed not to lose the money he lends you. If the loan is
unsecured, it is significantly more risky, as should you become
bankrupt, he may end up with nothing. While such outcomes are
rare, and hopefully will not happen, they are the bread and butter
of how interest rates are set.
Unsecured loans are different. You don't provide any security
to the lender. As such, the lender views the loan as a more risky
venture as the lender has no automatic route to get back what
it is owed. Therefore you'll appreciate, that if you're not a
homeowner you don't have to decide between a secured or unsecured
loan. As you have no property to secure the loan, you can only
apply for an unsecured loan. Unsecured loans are normally available
from £400 up to £20,000 (sometimes £45,0000), and the repayment
period can stretch from 4 to 13 years. As these loans are more
risky for the loan company, then on a like for like basis, they
charge a higher rate of interest for an unsecured loan compared
to a secured loan. Interest rate premiums of between 1% and 3%
quite common and if you have a badly impaired credit record, your
application may well be declined.
Amidst all the technicalities of obtaining a personal loan, one
of the most significant aspects still remains in the choice between
a secured and unsecured loan. That's because your decision ultimately
holds a huge bearing on how much your loan will cost. Moreover,
choosing a secured loan essentially places your property as collateral
for the repayment of your loan - which is no small move to make.
Yet, interestingly enough, more and more people are turning to
secured loans for their financial needs. That's because while
secured loans require greater collateral for repayment, they also
carry certain advantages which can outweigh unsecured loans in
the long run. Secured loans, for example, offer lower interest
rates and better loan repayment terms, such as extended repayment
options or variable interest rates. Secured loan borrowers can
also often choose between a fixed and variable rate, as well as
decide to pay nothing for the initial term of their loan. This
ultimately means that secured loan applicants have greater financial
flexibility and more savings options than unsecured borrowers.
Secured loans also provide the opportunity to repair a damaged
credit score; that's because as long as borrowers make their repayments
on time, lenders will make positive credit reports to all the
major credit reporting agencies. Applying for a secured loan also
automatically increases a consumer's chances of qualifying to
borrow money, due to the greater collateral involved.
