Once you have made the decision to take out a loan, the next step is to decide what type of loan you wish to take out i.e. Unsecured or Secured. In this guide I aim to outline the main differences between the two, what are the advantages and disadvantages of each type of loan in which should help decide which type of loan is most suitable for your current situation.
What are the main differences?
A secured loan is exactly what it says on the tin. The loan is secured against the person’s property therefore the bank has a safeguard in case the person taking out the loan defaults on their payments. These types of loans are often taken out on large sums, these have became more popular during the credit crunch as banks are now more reluctant to offer loans unless they are asset backed.
Unsecured loans are loans in which are not backed by any collateral, they’re based on the credit rating system in which looks at their applicants credit history such as phone contracts, unpaid bills etc. This helps determine whether the applicant is a strong candidate for an unsecured loan. These types of loans are also known as personal loans. The nature of an unsecured loan is not that it is based on anything secure as such but it is based on your ‘good name’ this being your credit history, defaulting on a loan payment can affect your future credit i.e. trying to get a mortgage.
Advantages and Disadvantages
The advantages of a secured loan are that the lender is likely to offer a larger sum of money as they know there is collateral in place, they also will give a longer time period to pay this back. The usual time period is between 3 and 25 years ranging from £3,000 to £50,000 although with some lenders depending on the collateral offered they may lend up to £100,000. The main disadvantage is self evident as failure to keep up payments could result in losing your property.
The main advantage of an unsecured loan is that it is ‘no risk’ in that you do not stand to lose any property for example. Although as previously mentioned it is important not to default on payments as this could affect your credit history in later life, this is a significant disadvantage.
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