You’ve probably heard of secured and unsecured loans, and may be aware that all loans fall under one of these categories. But how much do you really know about either type of loan, and can you always tell the difference between the two? We’ve outlined the basic facts below, to help you decide which type of loan is best for you.
Secured and Unsecured Loan Definition
A secured loan is one that requires security, or collateral. The most common type of secured loan is a mortgage – your property acts as collateral for the lender. This essentially means that if you default on the loan repayments, the lender has the right to repossess your home. Because the lender has this type of security, they are able to offer lower interest rates than unsecured loan lenders.
An unsecured loan is the opposite of this – the borrower doesn’t need to provide collateral. They instead simply make an agreement with the lender to make the repayments, with no risk of their property being repossessed. The borrower’s credit file will be negatively affected should they be unable to keep to the agreement, though this is also true of secured loans. As unsecured loans are riskier for the lender, they typically have higher interest rates.
- A secured loan needs some form of collateral (something of value) whereas an unsecured loan doesn’t
- As secured loans offer less risk to the lender, the interest rates tend to be lower than for unsecured loans
- Unsecured loans generally have a lower loan value and shorter duration than secured loans
- In terms of basing loan decisions on affordability, both types of lender will do this, but secured loan lenders often put more emphasis on your credit history
Secured Loan / Unsecured Loan Difference
The main difference between secured and unsecured loans is who is taking the risk. This can either be the borrower or the lender. With an unsecured loan, the lender is the one taking the risk, as they have no collateral should the borrower be unable to pay. Secured loans, on the other hand, are riskier for the borrower, as failure to pay can result in their property being repossessed.
Secured and unsecured loans also often differ in terms of duration. For the most part, secured loans are longer term than unsecured loans – mortgages in particular can be spread over up to 40 years. According to MoneyFacts.co.uk, 40 year mortgages are becoming the norm, with almost 60% of the residential mortgage products currently available offering a maximum term of 40 years. Unsecured loans are more likely to be repaid within a few weeks or months. Finder state that four out of five short term unsecured loans are paid off in a month or less.
In regards to loan size, as of 2020, the average short term unsecured loan is for £260, while the average mortgage size is £137,934. The difference in loan amount again comes back to risk – as secured loans are typically of a much higher value, the lender needs collateral to reduce the risk of lending. Security is less important with unsecured loans, as the values are generally significantly lower.
Loans Based on Affordability
When it comes to secured and unsecured loans, both types of lender will base at least part of their lending decision on your credit history. But what about your affordability?
Secured loan lenders tend to put more weight on your credit file and credit score than unsecured loan lenders. They need to see that you have been able to manage your money well in the past, before lending a large amount of money. As the loan balances for unsecured loans are generally lower, less emphasis is placed on your credit history by these lenders. They are more concerned with you being in a stable financial position in the present than the past.
Short term unsecured loan lenders in particular understand that nobody has perfect credit. Even if you have a few negative marks on your credit file, as long as you can comfortably repay the loan without putting yourself into any difficulty, you should be eligible for a short term loan. These lenders will ask to see things like your last wage slip and details of your income and expenditure, in order to confirm your affordability. You’ll also need to meet the following criteria to take out a short term unsecured loan:
- Be in part time or full time employment
- Live in the UK and have a UK based bank account
- Be aged eighteen or over
So if you’re looking to borrow from an unsecured loan lender, My Financial Broker can help put you in touch with the most suitable lender! We’ll match you with the lender that best meets your needs, and is most likely to approve your loan application. Simply click the button below to complete our short and simple application form!