Secured Versus Unsecured Loans

A secured loan uses an asset for collateral usually a car or a home and an unsecured loan does not. There are advantages and disadvantages to both and so it is worth finding out more about them before you make a decision about which will be the best one for you.

A secured loan uses an item as collateral which means that it can be cheaper. This is because the item used as collateral, such as a car or house, can be repossessed if the repayments are not made and can be sold to raise money to pay back the outstanding balance on the loan. Therefore the lender has some security which reduces the risk. Without collateral the lender has to rely on your credit rating in order to decide whether they think you are a risk or not. The riskier a loan, the more expensive the interest tends to be. This can mean that if you have a bad credit record you will be offered only high interest rate loans, both secured and unsecured, but you should still find that you will get offered cheaper secured loans compared to unsecured one. Therefore you will tend to find that an unsecured loan will be more expensive, regardless of your credit rating.

It may seem obvious to just go for the cheaper option but there are some other factors that you need to consider when you are deciding which type of loan will be the best type for you to go for. You need to make sure that you look at everything, not just the price, even if the price is the most important aspect for you.
You may not have anything that you are willing to use as collateral. You may feel that you do not want to risk losing your home or car for a loan. This may depend on how sure you are that you will be able to make the repayments on the loan and how valuable the items are to you, that you could potentially lose. Consider how you might cope should you lose your home or your car, for example. What impact would it have on you, your family and your career. You may think there is very little risk of this and it will depend on how high the repayments are and how well you think that you will manage to cope with covering them. Some people take out insurance to cover them if they cannot make repayments but it is wise to be very careful and make sure that the insurance covers what you are expecting.

You may not own your own home or car and then you have no option but to have an unsecured loan. This means that if you want to borrow money you will have to go for the more expensive option. This can be difficult as it means that you will have higher repayments or have to be repaying for a longer period of time and so you need to really make sure that you are happy to go for this sort of borrowing. Think about how you will be able to afford the repayments and how you will cope with the stress of having a loan for that period of time. If you miss repayments on an unsecured loan, then you will still be at risk of losing possessions. Debt collectors could be called in or bailiffs who may take items that you have in your home to cover the cost of the loan. You may face a court case and possibly even jail. This means that just because the loan seems like it is the option where you may have less to lose if you miss repayments, there will still be consequences if you fail to make them.

Cost probably is one of the biggest considerations when you are choosing a loan and so the option of a secured loan could be the best as it is likely to be cheaper. However, if you have nothing to use as collateral or you do not want to put items at risk of repossession then an unsecured loan could be the right option for you. You will need to consider how you will cover the repayments on the loan, whichever type that you choose and make sure that you have a plan and that you will be able to confidently make the necessary payments when required.

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