There are a number of different loan types within these two categories, such as consolidation loans, wedding loans, car loans, home improvement loans, and any purpose loans.
The eligibility requirements for secured and unsecured loans are different, so eligibility will be dependent upon your circumstances as well as other factors.
Many people that own their own homes decide to opt for a secured loan, as they find this a more affordable way of borrowing money. This is because the repayment periods that are offered with secured loans are far longer than with unsecured loans, which means that you can spread your borrowing over a longer time period and therefore keep your repayments down as much as possible.
You can enjoy some competitive rates of interest on secured loans although the actual rate of interest that you will be charged will depend on a number of factors, including your credit rating. One of the reasons many homeowners may opt for a secured loan is because these loans are more accessible to those with damaged credit than unsecured loans
However, it is important to remember that a secured loan can be a high risk if you are unable to keep up with repayments, and even if you are able to make repayments there is still the risk of falling into negative equity if house prices fall – this is where you end up owing more on your property than the property is actually worth.
However, the major risk with secured loans is that you could risk losing your home if you are unable to keep up with repayments, as these loans are secured against your property.
Unsecured loans, on the other hand, are entirely contract based and are not secured against any asset, which means that you do not risk losing your home if you are unable to meet the repayments – although you still risk damaging your credit rating.
Unsecured loans are available to both homeowner and non-homeowners that have a good credit rating. However, the lending levels are lower than with secured loans, and the repayment periods are shorter, which means that you may have to make higher repayments each month because your loan is spread over a shorter term.
This said, there are many people that prefer to have an unsecured loan – or are only eligible for a secured loan – so although the interest rates on these loans are said to have gone up by a significant level since the onset of the credit crunch last summer, they are still proving popular amongst those that are able to get them.
Of course, it is important to remember that in the current financial climate lenders have really tightened up on their lending criteria for unsecured loans and therefore you may experience more difficulty when it comes to getting a low cost loan.
Despite this many people may still prefer to opt for an unsecured loan over a secured loan. Those that do not own their own homes have no other choice but to opt for an unsecured loan, as they cannot qualify for a secured loan.
Some people may have access to both loan types but may prefer an unsecured loan because of the shorter repayment periods on offer, which means that they will be out of debt more quickly, as you can choose terms as short as one year, whereas most secured lenders offer loan terms starting at three years.
There are other reasons why borrowers may opt for an unsecured loan over a secured one. First of all you may not want to risk falling into negative equity, particularly at a time when house prices are set to fall, which means that many people could see the value of their homes plummet.
If you borrow against the equity in your home in the form of a secured loan and then house prices fall you could find yourself owing more on your home than the actual market value of the home.
Some people may simply prefer not to risk their homes by securing a loan against the property, and therefore prefer to borrow on an unsecured basis where no assets are at risk.
It is important to remember that whilst an unsecured loan does not pose the same level of risk as a secured loan in terms of the security of your home, you will be risking your credit rating and your financial future if you fail to keep up with repayments on the loan.
You should therefore always make sure that you can comfortably afford the repayments on the loan before you commit, and always discuss with your lender if there comes a time when you are unable to keep up with repayments on the loan.
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