If you find yourself in dire need of cash, borrowing money is one option to consider. For many people who don’t have any emergency fund or any family to lend them some cash, borrowing money may be the only option available. In this case, there are two basic categories of loan types to research, compare and look closely into.
Most personal loans fall into these two major categories, which are secured loans and unsecured loan. If you have no idea which type to go for, this quick guide to the battle of the personal loans should help you make an informed decision.
What are secured loans?
Personal loans that fall into the category of secured loans are the type that requires some kind of security or collateral. Your loan therefore, is protected by your asset, which may come in the form of your home or car and sometimes by other personal property, savings account, stocks or bonds. The most common examples of secured loans include mortgage, home equity line of credit and auto loan etc.
Why choose a secured loan?
Secured loans are an ideal option for people who are looking to avail large amounts of money. With your loan protected by a security, lenders are more willing to lend money even up to £100,000 or more depending on the collateral involved. Even if you aren’t able to pay your monthly dues at some point, lenders have the guarantee of your collateral to fall back on.
With secured loans, the interest rates are also cheaper compared with unsecured loans. Repayment terms are longer, and range between 12 months up to 25 years.
What are unsecured loans?
Personal loans that do not require any collateral naturally fall into the category of unsecured personal loans. These loans are much easier to avail because there’s no need for security. With just your promise to pay for the guarantee, lenders are taking more risks with unsecured loans. In the case of defaulting, the lender has no property or security to recover. Approval, in most cases, is dependent on your ability to repay based on your financial income. Examples of unsecured loans include payday loans, credit cards and personal lines of credit etc.
Why choose an unsecured loan?
If you only need a small amount of money to tide things over until the next paycheck, unsecured loans may be the perfect choice for your situation. With these types of loans, approval is quick and easy. As long as you can prove that you have sufficient financial resources to repay the loan, you can expect to obtain your cash in a matter of hours.
On the downside, unsecured loans may come with higher interest rates especially if you have a poor credit score. Because lenders are taking higher risks in the first place, they balance things out by charging higher interest rates. The interest is even steeper if you have a history of default or ccj against you. But while more expensive, unsecured loans remain an attractive option for many borrowers who are in need of quick cash.
The Bottom Line
When it comes to borrowing money, there is only one rule of thumb you should adhere to. Borrow responsibly and by responsibly, we mean thorough and careful planning. It’s not about which type is best but rather about what your needs are and what is best suited to meet those needs. There will be instances when a secured loan is the best option and there are also cases you’ll be better off with an unsecured loan. Either way, your job as the borrower is to keep the borrowing within the range of what you can afford to repay. And don’t miss any repayments!