Personal Finance – Secured vs Unsecured Loans

At one time or another many of us have had to make tough financial decisions, and taking out a loan can be one of the most difficult decisions to make. You have to try and decide what it is you want from your loan, how much it is you need to borrow and what sort of repayment plan your looking for before making such a decision.

When you decide to push forward with a loan, you then have to decide whether or not you wish to secure the loan against your assets. Doing so has both its advantages and disadvantages which I will try and address in this article; it’s Secured VS Unsecured loans.

The Basics

A secured loan is a loan that is secured against something you own, e.g. your home or your car.

An unsecured loan isn’t secured against any assets you own but as a result of this, the risk is greater for the lender.

The Current Situation

As a result of the current financial climate, being approved for a loan is becoming harder, lenders are more selective about whom they choose to qualify. The current market has meant that cheaper unsecured loans are becoming harder to come by and subsequently secured loans are becoming a more feasible option for lenders.

If you are looking to borrow a large amount over a long period of time then a secured loan could be the way to go, however, if you are looking to borrow a smaller amount over a shorter period then an unsecured loan could prove the right choice for you; it all depends on your personal circumstances.

Advantages / Disadvantages

Secured Loans: Advantages:

• You will receive a better, more affordable rate than an unsecured loan
• Your repayment period will be longer offering you greater flexibility with your payments
• Easier to borrow larger amounts of money than an unsecured loan

Disadvantages:

• You have to use your assets as collateral against your loan, failure to meet the regular repayments of the loan could result in the lender repossessing your assets
• As the repayment periods are normally longer than unsecured, this may mean you are in debt for a long time

Unsecured Loans: Advantages

• You can be eligible for one without having any substantial assets;
• You avoid the risk of loosing your assets;
• They are a better option for someone who wishes to only borrow a small amount.

Disadvantages:

• You would normally have to pay the amount back over a shorter period of time
• As you don’t have to place an asset as collateral, the risk for the lender is greater and therefore, the interest payments are normally higher than a secured loan
• It is tougher to be approved for an unsecured loan than it would be for a secured loan

It’s Your Decision

When you have read the pros and cons of each type of loan, you should try and identify which type of loan would best suit you. Taking out a loan is such a tough decision, you should be 100% sure of all the details before you finally make a choice; you may have to live with decision for a very long time. Both unsecured and secured loans have their advantages, they both suit a certain persons needs, compare as many of them as you can and decide which best fits your future.

This article was written by Andreas Nicolaides, a loans and finance writer for MoneySupermarket.com.