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If you’re looking into different loan options, you’ll probably come across the terms ‘secured’ and ‘unsecured’ loans. And if you haven’t taken out much credit before, you may not be entirely sure what the difference is between these types of loans. To help you gain a better understanding of secured and unsecured loans, we’ve explored this topic in more detail below:
When you take out a secured loan, you’ll need to have some form of collateral. This is something valuable, that the lender may have the option of repossessing should you default on the loan. The most common type of secured loan is a mortgage – your home acts as your collateral in this case. Another popular type of secured loan is vehicle finance, where your car would be the security against the loan.
Because secured loans come with less risk for the lender, they usually come with lower interest rates than unsecured loans. And if you have something to act as collateral, this form of credit can also be easier to obtain.
As the name suggests, with an unsecured loan, you don’t need to secure the money against anything. Essentially, you don’t need any collateral. Most personal loans are unsecured, which can either be short term or long long term loans. The interest rates for unsecured loans can vary, but will typically be higher than with a secured loan. This is due to the fact that the loan provider takes on more risk in lending to someone when there is no collateral on the line.
It’s good to remember that when there is more risk for the lender, there is less risk for the borrower. Because you don’t need collateral with an unsecured loan, there is no chance that your assets will be repossessed should you be unable to keep up with the repayments.
One of the main benefits of taking out a secured loan is the interest rate. As the amount of risk reduces when collateral is involved, lenders tend to offer lower interest rates with secured loans. And because many secured loans, such as mortgages, are longer term, even a small reduction in interest can make a big difference.
Lenders furthermore don’t expect you to have a faultless credit history with secured loans. While your creditworthiness will of course be considered, lenders will also look at things like your income and expenditure when making a loan decision. Your affordability is just as important as the information on your credit report.
Perhaps the primary benefit of unsecured loans is how accessible they are. There are many lenders who specialise in unsecured loans for bad credit, so you don’t need a perfect credit rating to apply. These lenders understand that information stays on your credit file for around six years, so your credit score may be poor due to late or missed payments from years ago. Your current financial situation will therefore be looked at more closely than your financial history.
Another advantage of an unsecured loan is that you don’t need to worry about having valuable assets you can use as collateral. Taking out a loan secured against your home, for instance, wouldn’t be an option for someone who was renting. And you don’t need to be concerned about losing your collateral either – there is no risk of anything being repossessed, as you won’t have used any assets to secure the loan.
Here at My Financial Broker, we help people find a suitable lender when they’re looking for an unsecured loan. We work with a network of reputable loan providers, many of which will consider your application even if you have a low credit score.
Our application is 100% online, so you don’t need to leave the comfort of your own home to apply, and shouldn’t take more than a few minutes to complete. You can also rest assured that we only undertake soft credit checks when you apply through us, so the application won’t have any impact on your credit rating. Though you should bear in mind that if you’re connected with a lender, they may choose to carry out a full credit check.
The best part of using our services is that it’s completely free for borrowers – we instead work on a commission basis with our lenders. So there are no hidden fees or charges to worry about! Apply today and you could have the money you need as soon as the next business day.