Unsecured versus Secured loans options
From time to time people will find themselves in need of a loan, whether it is because they need to fund a home improvement project, education and university costs, offsprings are getting married, the list goes on and on. Unfortunately, since the credit crunch, banks have been less forthcoming to lend money due to a number of factors such as recession, falling property prices, negative equity and rising unemployment; this has meant the number of products available and options is now limited.
What are the important differences between secured and unsecured loans?
Secured loans are normally taken against an asset such as a property or vehicle, in the event repayments are not made, then the property or vehicle may be at risk. Suffice to say, banks and other lenders are often more willing to give you a loan if it is asset backed.
Cheap, unsecured loans are also becoming harder to come by from the height of the credit boom. As a result of the credit crunch, lenders are more selective about who they will lend to and certainly those with a bad credit history may find they are unable to obtain a loan or offered a less than competitive rate.
Don’t give up just yet, for those wanting to borrow smaller amounts over shorter periods, an unsecured loan can still be found since the risks are smaller for the banks.
Advantages and disadvantages
Unsecured personal loans are available for a range of different amounts and repayment terms. Larger loans can usually be taken over longer terms, for example between seven and 10 years, and there is normally a maximum you can borrow with this route.
Some lenders do offer flexibility by allowing for over-payments and lump-sum payments, both of which allow you to repay the debt quicker than the term (please read the loan application small print as this varies from lender to lender).
With secured loans, the amounts are usually higher, depending on their perceived asset valuation and potential risks of defaulting on the payments. As with unsecured loans, the amount borrowed is paid monthly over the agreed term (note, if you do opt for a secured loan, then any assets used against the borrowing could be at risk if you fall behind on your payments). Again as with unsecured loans, some lenders do other flexible over-payments so that the term date is reduced.
If you fall behind with unsecured loans this could affect your credit rating and ability to borrow in future.
Before deciding how much to borrow, you should work through you monthly income and outgoings to ensure your repayments are within your means, don’t forget to factor in the annual items that tend to be paid off in one go. There are a number of online resources with income/outgoing calculators to help you understand your monthly cash flow requirements.
In recent years, it has been quite popular to consolidate all exist debts into one lump some, this reduces the admin costs and as the sum is normally higher, can result in savings due to the interest charges being more competitive. Please make sure you understand if there are costs to exiting an existing loan before the term is complete as this may have a penalty close.
Which is most suitable for me?
If you are self-employed, have recently changed jobs or have a less-than-spotless credit history, you may find that you have no choice but to opt for a secured loan.
If you are self-employed, have recently changed jobs or have a less-than-spotless credit history, you may find that you have no choice but to opt for a secured loan – as long as you are a homeowner of course.
Secured loans are also useful for larger amounts or where the applicant requires a longer repayment period.
Otherwise, an unsecured arrangement should suffice.
What are the alternatives?
If the amount is relatively small, say a few thousand, then a credit card could be a good option. With many deals offering interest free periods on balance transfers and purchases, borrowing on a credit card could potentially be cheaper than a traditional secure/unsecure loan. Please note, most providers charge a balance transfer fee, to move debt from one card to another.
If you are a homeowner and are looking to borrow more than a few thousand, then remortgaging your home is an option.
Mortgage rates are currently at historic lows, however, releasing equity in your home is normally more expensive due to the higher administration costs involved.
Secured loans are also likely to work out cheaper than remortgaging for homeowners who face stiff penalties to exit short-term, low-rate deals. If, for example, you are part way through a mortgage loan, you would normally have to pay percentage of the annual mortgage repayment to exit the current deal.
Mortgage lenders are also tightening their process in the aftermath of the credit crunch, meaning that low-cost remortgage deals are no longer readily available.
What if I have a bad credit rating?
All is not loss, with the so many resources on the internet such as financial product comparison websites, direct finance companies, etc, personal finance and the process of finding a bad credit loan has become quicker and easier than in recent decades. There are a number of lenders on the market that specialise on bad credit rating loans, however, these will normally come at a higher cost due to the additional risks the lender will need to consider.