Comparing Secured and Unsecured Loans

Posted by Nick Niesen on November 8th, 2010

Are you, like many people, trying to make sense out of your financial situation? Looking for a way to make ends meet? Struggling to keep up your monthly repayments on credit bills? If so, you might well be tempted by the widespread offers of consolidation loans and other easily available lines of credit, which promise you an end to your financial worries.

Unfortunately, life isn't that simple, and taking out a loan without proper consideration of the consequences can be absolutely disastrous for your future financial health. At the very minimum, you should be completely sure of the kind of loan you're applying for, and what the differences between the types might mean in your particular situation.

There are two major kinds of personal loan, Unsecured and Secured. Here we'll take a brief look at the main features of each, to help you be aware of what you're entering into when signing a loan agreement.

Unsecured Loans

These loans are the most common type, and are what most people think of when considering personal loans. They are usually for small to medium amounts, and are aimed at people with good credit ratings, and the sort of financial circumstances lenders love - a steady income large enough to cover repayments, and no great history of debt problems. To get an unsecured loan you don't have to offer any collateral to guarantee repayment, and so the lenders are looking for someone who represents a low risk. As there is no collateral involved, you don't have to be a homeowner. Rates are often attractive, and compare very favourably with other kinds of unsecured finance such as credit cards.

Secured Loans

These loans are only available to homeowners, as they're advanced on the basis that if you don't keep up repayments, the lender has the option of seizing your home, and selling it to pay off your debt with the proceeds. They are available for much larger amounts than unsecured personal loans, as you may be able to borrow as much as your home is worth or even more, and the repayment term is usually much longer - up to 25 or even 30 years compared to the 5 years which is more common with unsecured loans. Because of the security given to the lender by laying down your home as collateral, the approval criteria are often less strict, so it's easier to be approved, even with a poor credit rating.

Unfortunately this ready acceptance of applicants with adverse credit can mean that the interest rate charged is higher, as the lenders know that most applicants are unable to get finance elsewhere and will be happy to pay a little extra.

So now we've seen the differences and similarities between the two major kinds of loan, but what does it mean in practice? Basically, you should think very hard about turning unsecured debt into secured debt, and you should also consider carefully any attempts made by a lender to upgrade your unsecured loan application into a secured one. After all, defaulting on an unsecured loan will have very damaging consequences for your credit rating, but defaulting on a secured loan would mean losing your home.