Loans are often categorised as falling into one of two types – secured loans or unsecured loans.
These products may make funds available to you without you needing to guarantee it by legally securing it to one of your assets – most commonly your home.
Although this may sound attractive, there are a few things that may be worth keeping in mind (though remember, these typically apply but things may differ on a case-by-case basis):
- with unsecured lending lower amounts may be advanced than with secured loans, as the providers typically regard unsecured loans as being of higher risk than those that are secured;
- you may need to be of an exceptionally solid financial standing (e.g. exemplary credit history references) before a provider will consider you as being eligible;
- you may find that this form of borrowing may typically attract a higher APR (the rate that dictates the total cost of the credit to you) than borrowing that is secured;
- some providers may only offer unsecured loans over shorter periods.
Note that if you are unable to pay back a loan of this type, although it is not secured against one of your assets, the provider may have alternative legal methods to seek full recovery of the funds from you.
As part of the loan application, you will sign a legally binding document, which gives the provider the right to seize the asset you have used as security (typically your home – hence why this type of borrowing may often be called a homeowner loan) and force the sale as a way of recovering their monies plus charges.
Do note that other assets may be used in order to secure this sort of borrowing, such as cars, antiques, savings accounts etc.
The key advantage to secured loans is that it reduces the risk to the provider and confirms your confidence in your ability to successfully pay back the funds in line with the agreement.
It is a perfectly routine and normal form of borrowing that is, for example, classically associated with purchasing a house. Some people believe that by offering their home as collateral they will be unable to move home until they are able to repay the amount borrowed, but this is not the case.
Other people may worry that the lender can lay claim to the home at any time. Again, this is not the case. As long as you keep up your repayments, your home will not be at risk. This may come as a relief to homeowners who have not wanted to take secured loans in the past in order to protect their property.
The main advantages of secured loans are:
- due to reduced risk perceptions, you may benefit from lower interest rates and the availability of larger sums of money than compare with unsecured lending;
- you may be more likely to obtain a positive outcome to your application;
- you may be successful in your application, even if you have some forms of problem on your credit history records.
Of course, ultimately only you can decide which type of borrowing is likely to the most suitable for your particular situation.
As a point of market reality though, it may be difficult to obtain an unsecured loan for more significant sums of money. If you need larger sums over longer periods, you may have little practical alternative other than to seek secured loans.