Articles -> Secured vs Unsecured Loans

Choosing between secured and unsecured loans poses somewhat of a dilemma. Both have their advantages and disadvantages, however they both have a set of conflicting features and the disadvantages of one are countered by the other.

A secured loan is usually the standard way in which large sums of money are lent to borrowers who can offer collateral. Simply because of the collateral, which is usually your home, the lending limits are higher thus making this type of loan suited to the larger sums. Unsecured loans are a relatively new development within the finance industry compared to that of the secured loan. Unsecured loans were only brought about due to the gap in the market for people wanting to take out a loan but did not want to use their homes as collateral, or for those who did not own their own home.

If you are a homeowner and wish to apply for a secured loan and do not want to use your property as collateral then arrangements will be made between yourself and the lending company as to what other items you may which can be used for collateral. Typically the collateral will need to be of sufficient value to cover the loaned amount, and not be something that will suffer high depreciation, property and land are normally all that lenders will consider suitable for collateral.

However if it is not your desire to use your house as collateral, and you want to apply for an unsecured loan then it could prove to be more costly due to increased interest rate charges. This is because unsecured loans expose the lender to a greater risk of not being able to recover their money, with a secured loan there is always the collateral available to recover the funds from, this is not the case for unsecured loans.

With an unsecured loan your credit history will play an important role when the lending company is deciding to provide you the money or not. A secured loan is less critical of your borrowing history as they will have the collateral of your house to decrease the amount of risk involved.

A secured loan offers lower interest rates as well as an opportunity to extend the period of repayment by as much you like, between 5 to 30 years. Extending the repayment term will increase the amount of interest you will have to pay.

Whichever option you decide to choose, you must give both thorough and proper thought. If a friend has recommended one option it might not necessarily work out for you. The wrong option could end up costing you more money in the long term. Get a second opinion if necessary as it helps to test the validity of the advice offered to you by your lender.