Personal Loans

Secured Loans

Other Loan Types

Residential Mortgages

Buy to Let Mortgages

Other Mortgage Types

Mortgage Payment Protection

Life Insurance

Other Finance

Which Loan Type?

When arranging a loan, there are two main types available – secured and unsecured. So which one should you choose? What are the pros and cons of each? This guide should help you to understand what each type offers, what the differences are and how to judge which would be best for your needs.

Deciding between these options may not even be something that you have to tackle, as secured loans are only available to those who have collateral to cover the loan, which is in reality the borrower’s home. If you are a tenant, or have no equity in your home (for example, if you have a 100% mortgage) then the secured route will not be open to you.

One of the main benefits of a secured loan is the higher borrowing limit imposed by them, enabling you to borrow the kind of sums necessary for expensive pursuits such as an extension to your home, for example.

The reason why the borrowing limits are higher is simple, being secured means that the lender knows that the borrower has the money available to them to repay the loan, so limits will generally be capped to the value of the equity in the home against which the loan is secured. There are obviously other factors that will determine the amount you are allowed to borrow, your earnings will be a major factor as the lender will need to be sure that you have sufficient income to cover the repayments.

Unsecured loans are available to a wider range of people as they do not require the borrower to be a homeowner, and they are usually simpler to arrange, meaning you get the money you need sooner.

Presuming you are a homeowner, which one should you choose? Well this will depend on the amount you want to borrow, your circumstances and your approach to risk. If the amount you need to borrow is above the limits set on unsecured loans then the choice is simple, go for a secured loan that can provide the amount you need.

If both types of loan would be able to provide the money you need, then the choice will depend on the cost of the loan versus whether you are willing to offer your home as security. Generally speaking, secured loans will offer a lower rate when compared to unsecured ones, as the lender is taking on less risk – however the risk is transferred to you as the borrower. Failure to meet the repayments on a secured loan could see the forced sale of the property in order for the lender to recoup their money.

If you are confident that you will be able to keep up with the repayments, and the period over which the amount is to be repaid suits you, then in most cases a secured loan is the best option as it will offer lower interest rates and therefore cost you less.