The main differences between a secured and unsecured loan

Whilst both secured and unsecured loans serve essentially the same purpose, which is to provide consumers with finance to fund a range of purchases and purposes, there are a number of differences between these two loan types, as well as different eligibility criteria to consider.
If you are looking for a loan you need to decide whether you are looking for – or are eligible for – a secured or unsecured loan and as part of determining which option if the right one for you it is important to compare the main differences between these two loan types.
Taking on a loan that is not right for your needs and circumstances can prove expensive, and you therefore need to do all that you can from the start to try and get the right loan.
There are some keys differences between these two loan types, and amongst the important areas that you need to compare are:
Eligibility requirements
In order to be eligible to take out a secured loan you will need to be a homeowner, as these loans are secured against the equity in your property. You do not necessarily have to have good credit, as these loans are lower risk to the lender due to their secured nature.
You will need to meet certain other eligibility requirements, such as financial and employment status.
On the other hand, you do not have to be a homeowner in order to take out an unsecured loan, as these loans are based on trust and contract rather than being secured against an asset.
However, because the risk to the lenders is higher with these loans you will need to have a good credit rating in order to be eligible for an affordable unsecured loan. Again, there are other factors that will come into play when it comes to eligibility, such as your income, outgoings, financial and employments status, age, etc.
Borrowing levels
You will find that the borrowing levels between secured and unsecured loans can vary considerably, although the exact amount that you can borrow will depend on a number of factors.
If you are looking for an unsecured loan you will find that the maximum amount available is £25,000 in most cases. However, the amount that you are actually eligible to borrow will depend on your existing debts and outgoings, your income, your financial and employment status, your credit rating, and a number of other personal factors.
With a secured loan the borrowing levels can be substantially higher, but again the amount that you are actually able to borrow will depend on a variety of factors. Because these loans are secured against the equity in your home the level of your equity will help to determine how much you are entitled to borrow.
Other factors will also be taken into consideration when deciding how much you can borrow, such as your financial and employment status, your age, your credit history, etc. If you are looking to borrow a substantial amount of money and you have a high level of equity in your home then a secured loan is probably going to be your most promising choice.
Repayment terms
The repayment terms offered in secured and unsecured loan are very different. With an unsecured loan you will find that most lenders offer repayment periods of around one to five years, although there are some lenders that will offer seven or even ten year repayment periods depending on how much you are borrowing.
For most people an unsecured loan usually means a relatively short repayment period, which means that your monthly repayments will be higher so that you can repay the loan within the sorter period.
With a secured loan the repayment periods are much longer, and you may be able to take your loan over a twenty five year term, although you can still opt for a shorter term if you wish, such as three years.
These longer repayment periods mean that you have more time to pay your loan, and therefore your monthly repayments will be lower.
Bad credit
If you are looking to take out a secured loan then you may find that you are accepted even if you have bad credit and have been turned down for unsecured credit.
This is because these secured loans provide less of a risk to the lender due to their secured nature – however you will pay a higher rate of interest than someone with good credit.
If you are after an unsecured loan then you will have to have good credit in order to get an affordable deal on an unsecured loan. These loans are not secured against any asset, and therefore lenders have to be more careful about who they lend to when it comes to unsecured loans.