Last updated: 16/10/2020 | Estimated Reading Time: 5 minutes
Unsecured Loans Explained
Looking to compare loans? Then you’ll pretty swiftly come across two types: secured loans and unsecured loans. And it’s critical to know the difference when you are deciding on which loans to apply for.
This guide rounds up the pros and cons of both secured and unsecured loans and offers our expertise when it comes to applying for them.
In This Guide:
- What are secured loans?
- What are unsecured loans?
- Unsecured loans – Benefits
- Unsecured loans – Drawbacks
- Secured loans - Benefits
- Secured loans – Drawbacks
- Applying for an Unsecured Loan
- No assets and poor credit – can I get an unsecured loan?
- Secured vs Unsecured loans
What are secured loans?
A secured loan is a loan which is secured to an asset. This means that if you’re unable to repay, your asset could be repossessed in order for the lender to recover their money. They’re typically secured against high value items like houses or cars, and they allow you to borrow big bucks.
What are unsecured loans?
By contrast, an unsecured loan is a loan for which you’re not required to offer up collateral in the event you can’t pay. You’re still obliged to pay back what you borrowed, but as the loan isn’t secured against assets, lenders aren’t automatically entitled to repossess them. These are personal loans which typically range from £1,000 - £25,000.
Unsecured loans – Benefits
Unsecured loans are widely available and there are plenty of competitive rates out there. They’re also fairly flexible, with repayment periods spanning one to several years. You can choose a plan best suited for the sum you want to borrow – heads up: three to five years seems to get the best rates.
Taking a hiatus from repayments can be beneficial when going through a tight patch, and many lenders do offer break periods called payment holidays.
Unsecured loans – Drawbacks
Unsecured loans do come with their disadvantages though. Advertised interest rates only have to be offered to 51% of applicants (meaning the interest rates can be based on your individual case, not what is advertised, so they can be higher), and so the best deals are generally reserved for those with great credit scores. Cheap loans could be harder to come by, if at all, if your credit history isn’t tip-top.
If you don’t want to spend several years repaying a small loan, then expect higher rates of interest on shorter repayment periods. You could also be charged early repayment fees to pay it off early.
With no assets to be secured against, unsecured loans are higher risk and as a result charges will usually be higher. Plus, despite no asset security, you can still get a Country Court Judgement against you if you can’t keep up with payments.
Secured loans - Benefits
Poor credit history is the nemesis of anyone hoping to take out a loan. But securing your loan against an asset means those with less favourable credit scores can still apply and, usually, be accepted – you just might not access to the best deals.
In addition, not only can you borrow considerably more with secured loans, but you’ll usually be offered longer repayment periods than unsecured loans, allowing you to manage and budget your repayments consistently.
Secured loans – Drawbacks
Secured loans do come with a fairly big warning – a capital W warning. That is, if you miss payments your assets could be repossessed. In brief, lenders want to be confident they’ll get their money back; secured loans guarantee they will. It’s a lesser risk to the lender, hence why people with poor credit histories can apply for them.
Applying for an Unsecured Loan
Showing proof of your employment is extremely helpful when applying for a loan as it demonstrates to lenders that you have a means of paying them back. You may be asked to provide evidence.
It’s also likely they’ll want to check that you are, in fact, you, by looking you up on the Electoral Register. It’s advantageous if you’re on here, for it also allows lenders to pin down a fixed address for you if payments were missed and other forms of contact unsuccessful. Essentially, you’ll owe them a debt, so no disappearing!
If you’ve got a good credit history demonstrating you can pay money on time, then you stand a better chance of getting the best loans.
To summarise, lenders want to trust they’ll get their money back (fairly standard behaviour, really!) so they build a picture of the person they’re lending to. You need to show the best (but real) version of yourself to prove you’re reliable.
No assets and poor credit – can I get an unsecured loan?
It is still possible to get an unsecured loan with a poor credit history but be aware these won’t be cheap loans. Some companies won’t lend to those with bad credit history at all, others might but with a higher rate of interest due to the increased risk.
You could also look at taking out a guarantor loan, which is where a guarantor will make the repayments if you can’t. You might get a better interest rate, but guarantor loans can be a big ask: the rules still apply, and the debt becomes theirs if you don’t pay.
Lastly, avoid payday loans at all costs. These come with exorbitant interest rates and the Financial Ombudsman has upheld several complaints by customers against Payday lenders, some of which have since fallen into administration.
Secured vs Unsecured loans
If you’re unsure on whether to get a secured or unsecured loan, then a good springboard is the money: how much do you want to borrow? Unsecured loans are for smaller sums, secured for larger.
Know the risks of a secured loan – if you miss payments then your assets could be seized, but if you’re reliable they can be sensible long-term financial solutions.
Always run a loan comparison as part of your initial research. Cheap loans may be available for some people, but know the score when it comes to credit, especially if it’s not your strength. Spend time working out your desired loan period and total repayable figure, then compare loan prices with a keen eye on interest rates and any fees. Secured loan or unsecured loan, that’s how you’ll get the best deal for you.