Secured and unsecured loans options

Secured versus unsecured loans

With secured loans, if you cannot meet your regular repayments, then the bank or lender can obtain the asset where the loan is secured against inorder to settle the outstanding debt owed.

The asset that is normally used to secure the loan are items such as a car or property, with this in mind, you should always make sure you understand your income and regular outgoings inorder to borrow an amount that is manageable. The amount you can borrow is dependent on the current valuation of the asset, in the case of a property, then the current market valuation minus any existing loans and commitments you may have against it i.e. existing mortgages. Furthermore, other factors such as your income and other debts will determine your repayment ability and hence the maximum loan available.

In recent years, people have consolidated debt into one large lump sum to reduce the administration costs and obtain more competitve interest rests. This is an easy way to reduce your monthly repayment costs, however, logistically, it may not always be so simple due to early exit or redemption penalties on some loans.

Cheap, unsecured loans are also becoming harder to come by from the height of the credit boom. As a result of the credit crunch, lenders are more selective about who they will lend to and certainly those with a bad credit history may find they are unable to obtain a loan or offered a less than competitive rate.

Don't give up just yet, for those wanting to borrow smaller amounts over shorter periods, an unsecured loan can still be found since the risks are smaller for the banks. Unsecured loans do not require an asset as a security against defaulting on the debt, however, the amounts avaialble will normally be less than secured loans, in addition, to the rate being more expensive. Unsecured loans tend to be more flexible and cheaper to arrange as well as shorter term.

Ultimately, depending on your need and borrowing period, both sets of loans are good options for borrowing money, however, the term and how much you want to borrow will determine which option you choose along with your personal circumstances i.e. how much equity is available on an asset, monthly income and outgoings, other debts, credit history and how much debt you want to take on.