Secured and Unsecured Loans
Should you get a secured or an unsecured loan?
Most high street personal loans are in fact unsecured. That might sound like a bad thing, but it’s not. Rather, “secured” loans, those you’ll see endless television ads for, are the true bad guys. Here’s why you should steer clear of them.
If you default on a secured loan, your home could be taken from you.
When you take out a secured loan, this literally means you secured the debt with collateral (namely, your house or something else you own). What this means is that if you can’t repay her long, the lender can repossess whatever you’ve chosen as collateral, and if this is your home, that’s bad news. If the loan is unsecured, though, this is quite unlikely to happen.
Unsecured loan rates are fixed, while secured are usually variable.
If you take out an unsecured loan, it’s almost always true that you’re going to pay a fixed rate of interest. You’ll know what you’re going to pay from the start, and it won’t change under most circumstances.
Secured loans, by contrast, are variable. This means that the organization you borrowed money from (the lender) can increase interest whenever it chooses. Because a credit crunch is currently in full force, many secured loans have literally doubled their rates, which means that those who are responsible for paying them off have been hit doubly hard.
You’ll repay a secured loan over many years.
Oftentimes, secured lenders promise that you’ll have, “One easy low monthly repayment.” This sounds good, of course, but it’s going to stretch your debt over many years. This means that you’ll pay more and more interest, which will cost you much more than the original principal did in the first place.
This is important, so I’m going to say it here, point blank:
“When you take out a secured loan, you provide security for the lender, not for yourself.
In most cases, it’s much, much better to take out an unsecured personal loan and not one secured on your house.”
It’s almost never a good idea to take out a secured loan, then. It should only be considered as a last resort. Only in very limited circumstances is it a good idea to take out a secured loan. If you have reasonable credit scores, consider a personal loan, a cheap credit card deal, or a mortgage extension instead.
How to Choose the Right Loan
Take a close look at the fine print, because those loans touted as “low interest” can in fact be much more expensive than higher interest loans, because they have nasty hidden costs. Before you take out this type of loan, decide on couple of questions:
How much will you need and for how long?
Here’s what you need to do. You borrow as little as you possibly can, and repay it as quickly as possible. To avoid complications, only borrow what you can comfortably afford to repay (probably doing a budget to see what you need). If you over borrow, you can cause yourself unnecessary and very painful debt that can quickly spiral out of control. Make sure you question everything. Ask yourself at every turn how you can avoid costs so as to avoid some of the debt you are thinking about taking on.
Be careful as well because while borrowing over a longer period of time decreases your monthly repayments in that payments are spread out over a longer repayment period, you’ll greatly increase the interest you pay. For example, if you borrow £10,000 at 7% over three years, your interest will cost you £1,100, while borrowing the same amount over 10 years will cost you £3,900 in interest.
