There are two different types of loan – unsecured and secured loans. Both come with their own advantages and disadvantages, but which type you choose will generally depend on three things: your credit history, the amount you need to borrow, and what the loan is for. For instance, if you have a good credit score, and need to borrow a large amount of money to buy a property, you’ll need to take out a mortgage, which is a secured loan.
Difference Between Secured and Unsecured Loan
The obvious difference between secured and unsecured loans is the ‘security’. This means securing the value of the loan against something of equal or greater value. Security can also be called collateral – if you default on the loan, the collateral may be forfeit.
Unsecured Loan Meaning
An unsecured loan doesn’t require collateral. You simply make an agreement with the lender to make a one off or monthly repayments, and can borrow between around £100 and £25,000. If you are unable to keep to the repayment terms, this can have a negative impact on your credit rating, and the lender has the option to take legal action, but as there is no collateral, your property can’t be repossessed.
As there is more risk for the lender with an unsecured loan, the interest tends to be higher, though it’s important to keep in mind that you only pay interest for the length of borrowing. So if you’re only taking out a short term loan, you may pay back less interest overall.
Secured Loan Meaning
A secured loan does need collateral. The most common example of a secured loan is a mortgage – your property acts as collateral against the loan. This means higher risk for the borrower, as defaulting on the loan can lead to your home being repossessed. The upside is that lenders offer lower interest rates for secured loans, to compensate for this risk.
Secured loans are generally of much higher values than unsecured loans – mortgages are almost always hundreds of thousands of pounds, while secured business loans can be for millions.
- A secured loan uses collateral (usually the value of your home) to secure against the value of the loan
- You don’t need collateral for unsecured loans, but the interest rates can be higher as there is more risk for the lender
- Examples of secured loans include mortgages and peer-to-peer loans
- Unsecured loans include payday loans, bad credit loans, guarantor loans and debt consolidation loans
- Debt consolidation can be a good option for people who have a large number of smaller debts – you can lower your monthly repayments and the overall amount due by taking out a debt consolidation loan
Secured and Unsecured Loan Examples
There are a number of different types of both secured and unsecured loans. Depending on your situation, each one had its pros and cons, but no matter what you’re looking for, there should be a suitable loan solution. And if you’re not sure what type of loan would work best for you, it may be a good idea to speak to a credit broker.
We’ve listed some of the main examples of unsecured and secured loans below:
Secured Loan Examples
- Mortgages: A mortgage is the most common type of secured loan. The value of your home is secured against the value of the loan
- Peer-to Peer Loans: With peer-to-peer lending, instead of borrowing from a company, you borrow from another individual or group of people. These loans are often used by companies, and are secured against the business
- Business Loans: Many businesses need to take out loans to ensure that they have enough cash flow. Even if the business is profitable, they may have their capital tied up in stock or investments and need to take out a loan secured against the company
Unsecured Loan Examples
- Payday Loans: A payday loan is generally a small unsecured loan, that you’d typically repay on your next payday. These loans are therefore only borrowed for a few days or weeks. In terms of interest, payday loans often have high interest rates
- Guarantor Loans: A guarantor agrees to repay the loan if you are no longer able to afford the repayments. If your guarantor has a good credit history, you are likely to be approved for a guarantor loan. The interest rates also favour comparably with some secured loans
- Bad Credit Loans: If you have a poor credit rating, these loans can offer a solution, though they often come with higher interest rates. Bad credit loans are some of the most accessible types of loans
- Debt Consolidation Loans: A debt consolidation loan is used to pay back other loans – you’ll only have one loan to repay, rather than several
What is an Unsecured Debt Consolidation Loan?
As mentioned above, one of the options when it comes to unsecured personal loans are debt consolidation loans. Because they are unsecured, you are not risking your home being repossessed should you be unable to keep to the repayments. Secured debt consolidation loans do also exist, though they tend to be less common.
If you are considering debt consolidation as an option, it can be helpful to seek free and independent advice from companies such as the Citizens Advice Bureau and Step Change. They can help you decide whether debt consolidation is the right choice for you.
Essentially, the benefit of taking out one larger loan to pay off lots of smaller loans is to reduce the amount of interest you’re repaying. This way, you’ll only be paying interest on one loan, rather than several. It is important to check though, that the debt consolidation loan offers low interest rates, to ensure that you do pay back less overall. Your monthly debt repayments should reduce too, with a debt consolidation loan.
Another advantage of debt consolidation is having fewer outstanding creditors. If you have too many open loans, you may find it more difficult to take out future credit. It’s additionally good to note that consolidation loans should not impact your credit score. As long as you’re able to keep up with the repayments, this type of loan will be reported just like any other.
So if you’re looking to take out a debt consolidation loan, or any other type of unsecured loan, My Financial Broker can help! Once we know how much you’re looking to borrow, and what the loan is for, we can put you in touch with the lender best suited to you. Simply click the button below for a free no obligation quote.