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What is an Unsecured Loan?

What is an Unsecured Loan?
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When it comes to taking out loans, you will almost certainly come across the terms ‘secured loans’ and ‘unsecured loans’. All loans will fall under one of these categories, but unless you’ve done a little research, you may be uncertain about the similarities and differences between the two. To make it simple, we’ve therefore outlined the definition of secured and unsecured loans below!

What Does Unsecured Loan Mean?

As a generalisation, most smaller loans are unsecured, while larger loans often require more security for the lender. But what are the specific differences between unsecured and secured loans?

Secured Loan Definition

A secured loan is a type of loan that requires collateral. The most famous example of a secured loan is a mortgage. The value of your property is secured against the value of the loan. Therefore if you default on your loan repayments, the lender could repossess your property.

Essentially, secured and unsecured loans are all about risk. This can be risk for the lender as well as the borrower. Secured loans are generally much larger than unsecured loans, so represent a higher risk for lenders. They therefore require collateral, to reduce the risk. The interest rates are then typically lower for secured loans, as they are considered to be lower risk overall. The lender is able to reclaim their funds even if you can’t keep to the repayments, by repossessing your property.

Unsecured Loan Definition

Unsecured loans don’t use collateral, and therefore represent a higher risk for the lender. For this reason, unsecured loans tend to have higher interest rates. The benefit for the borrower though, is that your property is not put at risk – your home or other valuable items shouldn’t be repossessed should you fail to make the due payments. It is important to keep in mind however that missing or making late payments can damage your credit score.

An unsecured loan can be fall into many different categories. For example, short term loans, payday loans and guarantor loans are all types of unsecured loan. The loan value for these loans is generally lower than a secured loan, but some banks do offer large unsecured loans, of up to £50,000.

Key Points

  • While secured loans tend to be larger than unsecured loans, the difference is about risk, and whether the lender requires collateral
  • Unsecured loans tend to be more accessible than secured loans, which put a lot of emphasis on your credit file and credit score
  • There are various benefits when it comes to both types of loan – which one you opt for will depend on things like the loan purpose and loan amount

Secured and Unsecured Personal Loans

When it comes to loan eligibility, some lenders put more weight on your credit history than others. Secured loans can rely almost entirely on credit checks in terms of eligibility, so you need good credit to apply. You can check your credit score for free using sites like Credit Karma and Experian. They can also offer helpful tips on how to improve your credit score, particularly if you download the app.

Unsecured loans, on the other hand, for the most part are more accessible. Unsecured loan lenders believe that your current financial situation should be more important than your credit history. They therefore are just as interested in things like your employment status, your income and your expenditure as your credit score. Some unsecured loan lenders also specialise in bad credit loans.

Secured vs Unsecured Loan

Unfortunately there is no easy answer to whether secured loans or unsecured loans are better. Which one you choose will depend on your personal circumstances, how much you’re looking to borrow, and what you need the loan for. We have, however, highlighted some of the benefits of each below:

Advantages of Secured Loans

  • The interest rates tend to be lower for secured loans, as the lender has collateral should you be unable to pay
  • For the most part, you can borrow higher amounts with secured loans
  • By taking out a secured loan like a mortgage, you can gain equity in the property, and hopefully make back the money you have spent in interest

Advantages of Unsecured Loans

  • These loans are generally more accessible, regardless of your credit score
  • You may end up paying back less interest overall, as unsecured loans are usually shorter term. Most unsecured loans also don’t have early payment fees
  • There is no risk of your home being repossessed should you be unable to keep to the terms of your agreement

If you’re looking for an unsecured loan, My Financial Broker can help! Simply apply using the button below, and we can give you a no obligation quote for loans between £100 and £2,000. Our services are completely free for our customers, and applying shouldn’t take more than a few minutes via our online form.

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