Secured or Unsecured Loan? Now THAT is the Question!

When talking about personal finance and in particular loans, we are often met with difficult decisions that can take us a long time to make. Taking out a loan is a big decision that shouldn’t be taken lightly, you should always take into account all of the options available to you. When faced with dealing with loans, you may have to make the decision of taking a secured or unsecured loan, here I will try and detail the difference.

Make sure you compare loans before making a final decision on which is the best loan option for you, this decision could have a big impact on your financial future.

What is a secured loan?

If a loan is stated as secured, this means that it is secured against one of your assets, in other words it’s secured against something you own. A secured loan can be the most conventional way of financing a large sum of money; however, if you fail to repay the loan the lender could take possession of the asset you secured the loan against.

Advantages of a secured loan

  • Secured loans are a great way to obtain money at an affordable rate.
  • You are normally able to borrow more than you would be able to with an unsecured loan, offering you greater flexibility.
  • You are able to spread out the repayments over a longer period of time than an unsecured loan, making the money easier to pay back.
  • Secured loans are easier to get approved for if you have a bad credit history, as the lender has a sort of collateral against you, although, borrowing if you have bad credit may result in your interest being very high.

Disadvantages of a secured loan

  • Taking out a secured loan may result in you being in debt for a long time.
  • Failure to meet your secured loan payments could result in your losing your asset you secured the loan against, this could mean loosing your home.
  • If you don’t have a substantial asset to secure your loan against, for example a car or a home, you may not be eligible for one.

What is an unsecured loan?

If a loan is unsecured then you do not have to secure any assets against the amount to be repaid. Unsecured loans at good rates are becoming harder to come by; this is mainly due to the current economic climate. As there is a greater risk for the lenders when lending you money in an unsecured way, the repayment period is normally shorter, and the interest payments are normally higher.

Advantages of an unsecured loan

  • Taking an unsecured loan means you avoid the risk of loosing your asset.
  • You don’t need to have any substantial assets in order for you to be eligible for one.
  • Borrowing smaller amounts for a shorter repayment period can see an unsecured loan being the right choice for you.
  • Unsecured loans can be tailored to meet the financial needs of the borrower.

Disadvantages of an unsecured loan

  • Unsecured loans come with shorter repayment plans than secured loans.
  • Interest rates are normally higher on unsecured loans as the risk is greater for the lender.
  • The amount you can borrow is usually less than it would be with a secured loan.
  • Lending criteria tends to be tougher than with a secured loan.

2 Responses to Secured or Unsecured Loan? Now THAT is the Question!

  1. Jenna says:

    Thanks for this information. It’s easy to read and understand. Love the pro/con break down.

  2. I perfectly understood what is the difference between the two types…but I would like to know what happens if I fail to pay my unsecured loan!

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