How do Secured and Unsecured Loans Differ? By Sheila Challiner At Isnare.com Ezine Articles

When choosing the right finance you should be aware of the differences between the many options available so that you can make an informed choice about which product will best suit your needs. Think about whether you need to borrow a large or a small amount of money, what kind of time period are you looking at to repay the loan? What type of loan would be best for a homeowner or a person with a poor credit history?

The choices become much clearer when you know the differences.

A secured loan is arranged on the assumption that the borrower pledges some type of surety or asset to the lender. More often than not this takes the form of the borrower’s property. Hence if repayments are not made, the lender has the right to take away the property. With a secured loan, lenders usually offer a lower APR (annual percentage rate) because they have very little risk of losing any money. If you are a customer with a good credit history, lenders will often offer secured loans to a greater proportion of the equity which exists in the property.

Even if you have a poor credit history, secured loans are still easier to obtain than unsecured and sometimes past problems such county court judgements (CCJ's) or arrears can be discounted to an extent.

Secured loans are most suitable for people who want to borrow a large amount and who want a long period of time in which to repay. Secured loans are repaid monthly over a term of between three and twenty five years. Some lenders charge a penalty (which can be quite high) if the loan is repaid early. In all cases you should remember that your home will be at risk if you fail to make repayments on a mortgage or other loan where you have used your house as collateral. If you do default on your payments, a lender will apply to the courts for repossession of your property, normally after you have missed three payments, although some lenders will do this even earlier.

Perhaps because of this risk to the borrower it may not come as any surprise to learn that over 90 per cent of loans arranged in the UK fall into the unsecured category. Quite simply, with unsecured loans you do not have to put up any security to the lender and therefore there is no risk of losing your home.

This, of course, comes at a price because the lender takes all the risk and consequently charges more for doing so. Interest rates on unsecured loans are far higher and the term of repayment is usually much shorter. Unsecured loans are best for people who want to borrow money over months or a few years, to buy a car for example or carry out home improvements.

if you've had problems in the past with missed or late repayments on loans or credit cards, you could find it difficult to get an unsecured loan but it’s always worth asking. Indeed many brokers specialise in giving help to customers who might have had previous credit problems

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