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Family Debt: Secured Loans Vs Unsecured Loans

By: Jeff Durham - Updated: 9 Aug 2013 | comments*Discuss
 
Family Debt Secured Loan Unsecured Loan

For families who are looking to take advantage of a loan not only are you faced with hundreds of different options but you also need to decide if you want to take out a secured or unsecured loan and it’s important to know the differences and both the main benefits and disadvantages of each to help you to make an informed choice as your decision could have major implications for both you and your children.

Unsecured Loans

Unsecured loans, sometimes referred to as ‘personal loans’, are often the preferred option to people who need to borrow smaller sums of money and who wish to pay back the loan within a shorter period of time. They can be used to fund virtually anything and will often be used to buy a new car such as a people carrier if you’re ferrying several children to and from school or, perhaps, to pay for a family holiday or maybe to help fund your child through college or help go towards the cost of childcare and nursery fees when your offspring are younger.

One of the main advantages to the borrower is that, because the loan is unsecured, you are not usually at risk of losing your home if you find that you cannot meet your repayments during the term of the loan. Because the loan is unsecured, this obviously presents more risk to the lender who, in effect, is taking you at your word that you’re going to able to repay the money. However, the truth is a little more complicated than that as lenders will always have access to our credit history. Here, they will be able to check out how we have conducted ourselves with regards to any other loan or credit agreements we’ve had in the past. They can find out how much we earn or what our income is and can generally determine if we are likely to be able to meet the repayment terms of any new loan we might wish to apply for. Therefore, lenders are able to turn down many loan applications if they feel that a person is going to struggle to make the repayments. Usually, this will be because our credit record holds information such as any defaults we’ve had on previous credit agreements, any arrears we may have incurred and any CCJs we may have been issued with.

However, even if we have passed the stringent criteria for obtaining an unsecured loan, it certainly doesn’t mean that if we’re unable to repay it, then we’ve got off ‘scot free’ with the money. On the contrary, lenders can take us to court and we are still liable for any debt which we’ve incurred and we still have an obligation to repay the money.

Lenders make most of their money from the interest that they charge consumers. Therefore, as the total amount of money which can be borrowed (usually anything up to around £10,000 with an unsecured loan – although it can be higher), alongside the fact that we’d usually be asked to repay it within 10 years at the most, then they are a popular choice for consumers as the amount of interest the banks are able to make from us tends to be smaller.

Borrowers also need to be aware, however, that interest rates tend to be slightly higher than with unsecured loans to reflect the greater risk to the lender. And, whilst, unsecured loans tend to be made available to those of good financial standing, there are numerous lenders who will still make an unsecured loan available to someone who has a bad credit history, in certain circumstances. Don’t forget too that the ‘typical’ APR rate that may ‘lure’ you in, is only a guideline. The ‘typical’ rate means the APR which they are able to offer the majority of their customers. Usually, that means around two-thirds of all applicants will receive their advertised rate but this also means that around 1 in every 3 people won’t so don’t be fooled by the attraction of the rate as there’s no guarantee you will be eligible to receive it.

Secured Loans

The main advantage to the lender of the secured loan is that they are guaranteed to get their money back one way or another as it is secured against an asset, usually the home, of a prospective borrower. Therefore, most secured loans are usually only made available to homeowners, although there can be exceptions if you’re able to offer the lender another form of collateral which is at least equal to the value of the loan and can therefore guarantee its repayment – a boat or expensive car or caravan might be an alternative form of collateral you could potentially use.

The main advantages to the consumer are that you can usually benefit from cheaper interest rates due to the loan being less of a risk to the lender and, because the loan can be secured against your home, the lender is usually prepared to offer you more money and allow you to repay it over a longer term.

Secured loans are usually made available to those who want to borrow a sum from around £5,000 up to £75,000 over a period of anything between 5 and 25 years usually, although the amount you can borrow could be even higher, depending upon your circumstances. They are often the preferred choice of borrowers for things like making substantial home improvements which are often necessary if you need to consider things like extensions and/or extra bedrooms when more children come along but, once again, they can be used for most purposes.

Another advantage to the consumer is that, if you do have a bad credit history, then as long as you’re a homeowner or you have some other form of collateral, then the lender is not in the least bit concerned about how you’ve run your financial affairs previously as they know they will get their money back anyway as the loan is secured.

However, the main pitfall of a secured loan to the borrower is that you are most definitely at risk of losing your home (or other assets), if you fail to make the repayments. This would be devastating at the best of times but even more so if you considered how losing your home would affect your children. And, whilst you may benefit from reduced interest rates over an unsecured loan, you’ll usually end up paying far more interest over the entire duration of the secured loan as it is more likely to take you longer to repay.

Moreover, it’s not just a simple matter of making your decision between either choosing a secured or unsecured loan. With both of them, there are a whole host of differences within each product with early redemption charges, flexible or fixed term options and arrangement fees just some of the jargon which can cause you even greater confusion.

An independent loans broker will be able to find out what options are available to you and can offer you the cheapest deal based upon your own specific circumstances. Therefore, as reputable brokers don’t charge for this as they make their money from commission, it’s always worthwhile speaking to one first or else, by doing it all yourself, you could end up repaying far more for your loan than you actually need to.

The Money Advice Service Money Advice Service can offer extra information about loans and how to choose the right on for you.

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