What are secured and unsecure loans?

When you've finally taken the plunge. Yes, when you've finally decided to actually step up, and ask for a loan, you then realise that there is another choice to make. Secured or unsecured? What's the difference?

A secured loan essentially offers means that the borrower will pay back the lender, and give a guarantee that the lender will receive payment for the loan.

Loans Secured Against Property and Valuables

This type of loan is common with assets like owning a home where you have to pay back a mortgage every month at a certain price.

This type of loan is good because, the off chance that you do default on your loan, you'll have some type of asset in which the lender can seize in order to recover the losses the borrower was unable to pay.

Loans with No Security Rely on your Credit Worthiness

An unsecured loan is a type of loan that relies on your credit rating in order to get the loan.

This is an alternative type of loan for people who either don't have assets or for people who don't wish to turn over their assets in order to get the loan. Neither loan is considered better or worse than the other.

Pros and Cons of Secured Loans and Unsecured Loans

It depends more on personal preference, and situation more than anything.

Also things to consider would be how long is the loan re-payment period, what is the interest rate, and how much is the borrower borrowing.

Secured Loans May Offer Better Rates

Secured loans tend to be better on interest rates (they have lower interest rates usually). They also usually have a long-term payback period, and give a higher amount of money to the borrower.

However, depending on the borrower's situation or point of view, it may not be an option. But it's just good to assess the pros and cons with both types of loans before making a final decision.

Different Types of Unsecured Loans

Some unsecured loans, such as payday loans, offer small loans (£80 - £1000) and require very basic information and have high rates of acceptance, regardless of the borrower's credit history and salary.

Unsecured loans for amounts over £1000 may require borrowers to have a more solid credit history and to be earning above a certain amount.

Unsecured Loan Costs Cover Risks

As there is more risk and less profit for the lender, an unsecured loans will normally cost the borrow more than a secured loan.

If the borrower defaults on payment they will end up paying more than the original repayment plan but will not lose their home, car or other property. In the worst cases, failure to stick to the loan agreement could involve county court judgements and bankruptcy.

Unsecured Payday Loans

Payday loans are unsecured short-term loans, usually for a period of 28 days - or until payday. Borrowers can take small loans, up to £1000, the most common loan amounts are between £300 - £500.

The APR on a payday loan is high because they are designed to cover short periods of time and not years.

Applying for an unsecured payday loan is quick, normally done on line and requires borrowers to supply basic information, including monthly salary, contact and employment details.