Secured Loans Vs Unsecured Loans

If you’ve been looking into the possibility of taking out a loan, you may have come across secured and unsecured loans. There are several differences between them and it’s important you know these before you make a loan application. To help you understand which one is right for you, let’s take a look at the differences between them.

What is a secured loan?

A secured loan allows you to borrow money against something you own – this could be your home, car or something else that has a value greater than the amount you are borrowing. This will act as ‘security’ for the lender, if you’re unable to keep up with repayments.

Secured loans usually allow you to borrow a greater amount of money, over a longer period of time, because they’re less risky for the lender. You may also find they have a lower interest rate than an unsecured loan.

If you don’t keep up with your repayments or are no longer able to make them, then as a last resort your lender can use the possession that you secured the loan against as repayment.  If you’ve been late with loan repayments, your credit score may also be affected. Read our blog for tips on how to improve your credit score.

Some examples of secured loans are homeowner loans and car finance, you can even get secured credit cards.

What is an unsecured loan?

Unsecured loans are very straightforward. Your application is based on your credit rating and whether you can afford the loan repayments on top of your other outgoings. This means you don’t have to own your home or secure the money you borrow against any of your possessions.

With an unsecured loan you don’t have the risk of having any of your possessions taken away if you don’t make your repayments. It will most likely harm your credit score if you don’t make your repayments, which could impact your ability to borrow money in the future.

As there’s more risk to the lender of them not getting their money back in full, interest rates may be higher on unsecured loans. You may even find that some high street lenders have stricter lending criterias too.

Unsecured loans are often referred to as personal loans.

Secured and unsecured: what are the pros and cons?

	Pros	Cons
Secured	With a secured loan you can usually borrow larger amounts of money. They can usually be easier to qualify for, as the lender has a way to repay the loan if you are unable to. The money can be borrowed over a longer period of time.	If you don’t keep up with your repayments, then you could risk losing your home (or other item you secured the money against). It can take longer to borrow the money as there’s more factors involved. Even though the interest rate may be lower, you could end up paying more in total due to the longer length of the loan.  There may be additional costs for setting up the loan.
Unsecured	You don't need to own your home or car.  There's no need to offer any security to potentially lose if you can't keep up with your repayments. They're more suitable for borrowing smaller amounts over a shorter period of time.	The interest rates tend to be higher.  Failing to repay the loan on time could have an impact on your ability borrow money in the future.  You may not be able to borrow large amounts, e.g. over £25,000. Your financial situation (income, outgoings and outstanding debts) and credit history are more of an important factor for a lender.

Should I choose a secured or unsecured loan?

If you’re looking to borrow a small amount of money over a relatively short period of time then an unsecured loan may be the better option for you. There’s also no risk of the lender taking anything you own if you can’t keep up with your repayments.

This does mean that the lender could be stricter with their lending criteria than they would be with a secured loan. They will pay attention to your credit score and how well you’ve managed loans in the past. This means you may need to improve yours to be approved for a loan.

You will usually find that the interest rate on a secured loan is lower, however as the repayment periods can be longer, you may end up paying more in total.

Sometimes an unsecured loan could be unsuitable for what you need the money for. If you’re planning for example, a major renovation, then a secured loan may be the best option to get the money you need.

No matter what type of loan you choose, the most important thing is to only borrow what you can realistically afford to pay back. Think carefully about how much you’re borrowing, why you need it and the fees and charges associated with your loan.

About Dot Dot Loans

Dot Dot Loans is an online lender of unsecured cash loans. You could borrow between £200 and £1000 with our short-term loans,and £1500 to £4000 with our long-term loans. The repayment periods are fixed over 3 to 48 months, depending on the amount you wish to borrow.

We even offer unsecured loans for bad credit, so don’t be put off from applying if you have a less than perfect credit score.

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