If you have the option of choosing between unsecured and secured loans, it is important to weigh up the pros and cons of each before committing to one or the other. In this guide, Norton Loans discusses these two types of loans in more detail.
Secured loans require the borrower to put forward collateral, usually a house, before they borrow. This property then serves as a guarantee that the loan will be repaid, even if you do not have the cash to make your monthly repayments later down the line. With secured loans, Norton Finance says that lenders will usually be more generous in terms of the amount they are willing to borrow, as well the time period for repayments when they have this collateral. Loan providers offering secured lending will also tend to be more flexible in terms of who they lend to, because they have this guarantee of repayment. This means that even those with poor credit, defaults and CCJs may be offered a secured loan.
There are of course, disadvantages to this type of loan; firstly, Norton Loans points out, if you cannot make the repayments, then the lender has a legal right to take your home in lieu of this missing money. Secondly, overall, secured loans can tend to work out as more expensive than unsecured, due to the higher interest rates and longer repayment periods.
Unsecured loans do not require the borrower to use collateral; instead, the lender relies on the borrower making a legal promise to pay back the money. This means that it is highly unlikely that your property would be repossessed if you cannot make your repayments. Because these loans are not secured, the lender will normally offer the loan on risk based criteria, so that they can determine who they should lend to, as well as what interest rate they should offer. This means that those with poor credit histories are less likely to be approved for unsecured loans. However, for those who are approved, fixed interest rates are the norm for unsecured loans, which Norton Finance explains, makes budgeting for repayments much easier.