What is the difference between a secured and unsecured loan?
An unsecured, or personal loan is a relatively small amount of borrowing, usually between £1000 and £25000. There are no restrictions as to how this money is spent – as long as you keep it legal! A personal or unsecured loan is usually set at a fixed interest rate across a fixed payment term, allowing it to be easily budgeted as the monthly repayment amounts do not change. A personal or unsecured loan is granted based on the credit score of the applicant. Those with a favourable credit history can benefit from lower interest rates because they have a proven record of successfully managing their debt and so pose a reduced risk to the lender. Conversely, those with a poor credit may be rejected for this type of borrowing and may only be able to get a loan if the borrowing is secured against an asset.
A secured loan is usually taken out for larger sums of money. The loan is secured against the property of the borrower, such as his house or car. This provides the lender with collateral that can be repossessed should the loan repayments not be made. As a result of this security, this type of loan can benefit from competitive interest rates and lengthy repayment terms, although the risk to the borrower is far greater than the unsecured alternative.