Unsecured loans
Unsecured loans, also known as personal loans mean that you can borrow money without providing any security, such as your home or your car, against the loan to the lender. Therefore it’s not as easy for the lender to repossess your home or car if you miss loan repayments.
Borrowers can get large loans nowadays– up to around £25,000.
Personal loans normally come with fixed interest rates, which is useful because you’ll know how much you need to pay back each month – regardless of whether interest rates in general go up or down.
0% balance transfer cards are an alternative to unsecured loans.
- Instead of taking out a loan to pay off other debts on store cards, credit cards or an overdraft, think about transferring it to a 0% balance transfer card. You may be charged a fee, but you won’t pay any interest on your debt for the period that the 0% lasts for – usually a year.
- Be aware that if you haven’t paid off the debt by the end of the interest free period, you’ll have to transfer the debt to another card to avoid paying high interest rates.
Secured loans
A secured loan is where a lender uses assets that you own, usually your home, as security against the loan. Therefore if you miss repayments on a secured loan, the lender is able to take the asset in place of the debt.
The amount that you can borrow with a secured loan is larger than you can get with an unsecured loan, and the loan period often lasts for longer too.
Secured loans can sometimes come with a variable interest rate so your monthly repayments could go up or down. It’s important to remember that your home is at risk when you take out a secured loan, so do consider it very carefully before deciding to take out this type of loan.
Remortgaging is an alternative to a secured loan
If you have a mortgage deal that is coming to an end, one way to borrow without taking out a secured loan is to remortgage for a larger amount as interest rates on a mortgage are generally less than on a secured loan. If you still have time left on your existing mortgage, your lender may lend you more and the interest rates you’ll pay are likely to less than you’d pay on a secured loan.
When to take out a secured loan
There aren’t many circumstances where a secured loan is a good idea, but they are appropriate for a small proportion of borrowers. The majority of the time, it’s better for you to take out an unsecured loan or use a 0% balance transfer card.
If you need to borrow more than £25,000 however, it might not be easy to do this unless you secure it against your assets and to help with the repayments, you might want to have a long loan period. This may be a situation where you might want to apply for a secured loan, but do think about remortgaging as an alternative as the interest rates on are remortgage are normally lower.
This solution won’t suit everyone as with remortgaging you may be faced with early repayment charges if you recently took out a new mortgage and are still tied in for the initial period.
Another option may be a further advance (i.e. a second mortgage) from your existing lender. The interest rate will be better than you’d get on a secured loan, but may not be at the same rate as your existing mortgage. If however you can’t get a further advance and would find it costly to remortgage, then getting a secured loan may be the best option in this case.
Another situation where a secured loan may be suitable is if you have a residential mortgage at a good rate, but your credit rating has since worsened. It’s appropriate because remortgaging now or taking out a further advance means you may end up paying more interest than you would on a secured loan.
If this sounds like you, you may want to speak to someone on our mortgage team before following this path. It’s free and may save you money!
Facts and fictions about secured loans and unsecured loans
True or false: It’s safer to take out a secured loan than an unsecured loan
False: It’s a mistake to assume that secured loans are safer because in this context, ‘secured’ means safe for the lender – not for you! Secured loans are much more risky because your home is used as collateral against the loan and you could therefore lose it.
With this type of loan you’re basically offering your lender a guarantee that they’ll get their loan back in the form of your assets if you fail to repay the loan. Therefore if you don’t make your mortgage payments, the lender can take your property.
The majority of lenders will only lend large amounts (more than £25,000) as a secured loan.
True or false: My home is not at risk if I take out an unsecured loan
Fiction: If you default on your loan payments and are a homeowner, your creditor might attempt to get a charging order on your property, despite the fact that you haven’t ever offered your home as collateral against the loan.
A charging order means that upon the sale of the property, your debt will be taken from the money you make before you get it. Furthermore, if a creditor is granted a charging order, they then can apply for an Order to Sell from the court and in the same way that your house is repossessed if you default on a secured loan, your house is sold, the creditor is paid and you’re left without a home.
On the other hand, you may be given time to sell your house yourself. It’s much more difficult for your creditor to repossess your home if you default on an unsecured loan rather than on a secured loan, but it’s a possibility nevertheless and you should consider this when taking out an unsecured loan.
True or False: The longer the loan period lasts, the more interest you’ll pay.
True: The faster you pay off your loan, the better. Decide carefully how long the period of your loan should be. Spreading your payments over 5 years rather than 3 means that although the monthly payments will be less, you’ll end up paying more interest during those 5 years so it will ultimately cost you more.
Ensure that you can afford the level of payments that you agree to and aim to pick a loan that you can pay off quickly so you pay fewer charges.
Key terms for loan shoppers
If you’re thinking of taking out a loan, look out for the following terms:
Typical APRs: To be able to quote the ‘typical APR’, only 66% of the lender’s customers need to be offered the loan. Borrowers with a poor credit rating may not necessarily be offered that rate.
Tiered interest rates: Often lenders will offer favourable rates of interest to those borrowing over a certain level. For example, if you want to borrow £5000, it may be better for you to take a loan of just over £5000, to take advantage of a lower interest rate. However, use our loans calculator to check your figures before you make your decision.
Repayment holidays: At first glance, this seems like a good idea as it allows you to take a break from paying off your loan. However, as you’ll still incur interest during your repayment holiday, it will take longer to pay off your loan.
Early repayment charges: If you pay off your loan early some loan providers will charge you a penalty. It’s a good idea to pay off a loan early if you can afford to because you’ll save money in interest, so find a loan that you can repay early without any receiving any penalty charges.
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