Personal Loan: Secured or Unsecured?

Personal loans are very common nowadays. There are very few people who have never had one at some point in their lives.

It wasn’t always like that. In our grandparents’ time the idea of taking out a secured personal loan, or any other type of loan, was abhorrent. You just didn’t borrow money. If you did, it was seen as a disgrace. If you wanted something, you saved up for it.

But times have changed. Computerisation makes it easy to check on people’s private and financial circumstances. Nobody sees borrowing as a problem any more. There is usually one, and only one, criterion. Can you afford to repay the loan? The loan is broken down into monthly repayments over a period of time, and the loan company only needs to know that your MONTHLY income is enough to afford the MONTHLY repayments.

So when you decide to ask for a personal loan, you usually find there are two choices – a secured personal loan or an unsecured loan. Which should you choose?

An unsecured loan has no form of security. For this reason the interest rates will probably be higher and you will find it hard to qualify if your credit rating is poor. Finance for purchases such as electrical appliances or cars is usually on an unsecured basis, if it’s provided by the seller.

A secured personal loan may be easier to obtain and is a more common choice.

• If you want a secured personal loan, you have to provide the lender with security in case you are unable to repay the loan. This could be an expensive item such as a car (a decent one, not an old banger) but is usually your house.
• A secured personal loan is less risky for the lender, so interest rates are lower.
• A secured personal loan is easier to qualify for. If you have a poor credit rating, the lender won’t be so worried if the loan is secured against your house.
• The lender will still check that your income is sufficient. They don’t really want to repossess your house, they want to get their money back. Repossessing your house is a very last resort.

The big thing you have to remember about a secured personal loan is that you are putting your home at risk if you can’t keep up the payments. Although taking possession of your house is a last resort, the lender will certainly do so if they can’t get their money any other way. So it’s up to you to make sure you aren’t over-extending yourself, before you take any kind of secured loan.

Sean Horton is a Director of Loans Connection who offer secured personal loans for any purpose