Loans. Should you take a secured or unsecured loan?
If you want a loan, one of the first issues you’ll have to decide is whether you want a secured or unsecured loan. The decision is rarely straightforward so here’s a few pointers.
Let’s start off making sure you know the difference between the two sorts of loan.
With a secured loan, you give the lender the right to register a legal charge on your property at HM Land Registry. As most people have a mortgage that is secured by a first charge on your property, the loan company agrees to take a charge that ranks behind the first charge. This means that if your home is sold, then the sale proceeds would first be used to repay the mortgage and then the remainder becomes available to repay the second charge (and any other registered charges). Then, when all the charges have been repaid, you receive the balance of the sale proceeds.
The central point you have to appreciate about any secured borrowing, is that if you default on the repayments, then the lender automatically has the right to apply to the Courts to repossess your home and sell it to recover the money they are owed. In this context, you need to think very carefully before you agree to such a charge.
With an unsecured loan, you don’t provide the lender with any security. As such, the loan becomes a more risky venture for the lender as the lender has no automatic route to recover what it is owed.
You will appreciate therefore, that unless you’re a homeowner you don’t have to decide between a secured or unsecured loan. As you have no property, you could only qualify for an unsecured loan.
As a general guide, unsecured loans are available from £500 up to £15,000 (sometimes £25,000) and the repayment periods range from 3 to 12 years. As these loans are more risky for the lenders, then on a like for like basis, they charge a higher rate of interest compared to a secured loan. Interest rate premiums of between 1% and 3% aren’t unusual and if you have a poor credit record your application is quite likely to be declined.
Lenders are far more relaxed if you agree to a secured loan. Typically the amounts they’ll lend are greater ranging from £5,000 to £75,000, and even more. And they’ll allow you to spread your repayments over a much longer period – 10, 15, 20 and 25 years are common. The interest rate you’re charged will then depend on your credit rating, so in today’s market this could be as low as 6.7% if you have a good track record - but as high as 18% to 20% if you have severe credit problems.
These days around 50% of homeowners have some form of impairment on their credit record. This means that even if they want an unsecured loan they’re probably going to be declined. In these circumstances the only option available will be a secured loan and even then, they won’t qualify for the lowest interest rates.
The problem is that even though your instinct tells you to shop around for the best deal, if you do and in the process make multiple loan applications, you’ll actually damage your credit rating. That’s because each application you make is recorded by the big credit agencies such as Experian, and the more applications they record, the lower your credit rating becomes. As a result the interest rates you are quoted will tend to increase with each successive application and in the end all you will get is outright refusals. Not only that, but your now worsened credit score could stay with you for years making your financial life very difficult.
So what’s the solution? Your best bet is to use a loan broker. With their knowledge of the loan market they will know which lender is most likely to accept you at the best possible interest rates. This means that you avoid making multiple loan applications and are assured a good deal.
And where can you find these brokers? Online of course! Just search for “secured loan” and you’ll find lots to choose from. Even better, make life simple - click on “Loans” on this web site and we’ll find you a great loans deal!
More Loans FAQ’s
More Loans Articles
