Loans are often categorised as falling into one of two types – secured or unsecured.
These products are provided without the need for you to provide security in the form of your home or any other asset.
Although this may sound quite attractive at first, there are a few considerations that you should keep in mind. (However, the following statements may differ on a case-by-case basis):
- with unsecured lending, lower loan amounts are offered 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) before a provider will consider you as being eligible;
- you may find that this form of borrowing attracts a higher APR (the rate that dictates the total cost of the credit to you) than secured borrowing;
- 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 – which is why this type of borrowing is often called a homeowner loan) and force the sale of your property as a way of recovering the debt plus charges.
Do note that other assets may be used in order to secure this type of finance, such as cars, antiques, savings accounts and jewellery.
The key advantage to secured loans is that they reduce the risk to the provider and confirm 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 house 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 simply not true. As long as you keep up the repayments, your home will not be at risk. This may be a relief to homeowners who have previously discounted secured loans 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 compared with unsecured lending;
- your application is more likely to be approved;
- your application may be even be successful if you have a less than perfect borrowing history.
Of course, ultimately only you can decide which type of borrowing is the most suitable for your given situation.
However, it may be difficult to obtain an unsecured loan for significantly larger amounts of money. If you do need to borrow a larger amount over a longer period, a secured loan may be the only option.