Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk

Ready to Borrow Money: Secured Loans or Unsecured Loans?

When you are ready to borrow money, you have a choice between secured loans and unsecured loans. A secured loan requires collateral. Collateral is an asset that you own such as your vehicle, or your property, or even a fixed deposit at a bank. As a borrower, it’s important to know the pros and cons of different loans.

With a secured loan, the lender – the loan provider – will hold the title deed to your property, or your vehicle until you repay the loan. If you fail to make a payment in a timely fashion, the secured loans provider can take ownership of your assets. Simply put, you are offering your property as a guarantee that you are good for the money.

A secured loan agreement is a legal contract signed between a borrower and a lender. If a borrower is late with payments, or defaults on the debt, the lender can sell the assets to recover costs. With secured loans, you can expect higher borrowing limits, since you are putting up guarantees for the money. Several types of secured loans are available, including home equity lines of credit, mortgages, car loans, and even certain types of credit cards.

Note that the interest rates on secured loans can either be variable (they change based on the bank rate), or fixed. Typically, you can expect a secured loan to involve more paperwork than an unsecured loan, since verification procedures need to take place. We will now turn our attention to unsecured loans.

Components of Unsecured Loans

Most short-term loans are unsecured loans. Payday loans and credit cards are examples of unsecured lines of credit. With an unsecured loan, you are not required to use any collateral. The interest rates on unsecured loans are higher than the interest rates on secured loans. Since the lender takes on additional risk, the reward must be greater. With an unsecured loan, you can expect a fixed interest rate and a fixed repayment term.

Repayments on an unsecured loan requires discipline. Remember, the loan repayment will be the same every month until it has been repaid in full. Borrowers are advised to use an interest rate calculator to determine the total interest repayments on the principal. Fortunately, it is rather quick and easy to be approved for an unsecured loan. The borrowing limits are less, given that there is no collateral to protect the lender.

Pros and Cons of Secured Loans and Unsecured Loans

The pros of secured loans are as follows:

• Lower Interest Rates

• Higher Loan Amounts

• Less Emphasis on Your Credit Score The cons of secured loans are as follows:

• Your Collateral Is at Stake

• A Lengthy Approval Process

• Lots of Paperwork

Now let’s turn our attention to unsecured loans:

The pros of unsecured loans include:

• No Need for Collateral

• Online Loans Available

• Quick Processing and Approval

The cons of unsecured loans include:

• Higher Interest Rates

• Lower Loan Amounts

• Credit Score is Important

What Online Loans are Best for You?

Borrowers who are concerned about not being able to repay a loan should not attempt to apply for a secured loan. Plus, experts don’t recommend putting up collateral for a loan unless you can make the repayments. If your credit history is poor, you will do well with a secured loan since your collateral is what the lenders will look at. Anyone looking for short-term financing in between paycheques will be much better off with an unsecured loan since you can repay the loans with paycheques and not risk losing your car or your home. If you are gainfully employed, and you need cash quickly, an unsecured loan is likely a better option.


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