Secured loans are typically used for larger amounts over longer periods of repayment. The reason this is done is that they are costly and time-consuming to set up. Since arranging the searches and registering the property interest (the usual security is taken for a secured loan) takes weeks to complete.
So immediately, one drawback can be the time taken to get a loan on secured terms. If you need a loan quickly, you will need to look for one or more unsecured lenders since their procedures are much quicker to complete with some advancing money within hours of receiving an application.
To even apply for a secured loan, you will have to have some free equity in your home or some other form of a valuable asset to pledge. That means that your home must have a surplus value over the current mortgage loan of at least 125% of the loan being applied for. If you need a $20,000 secured loan, you must have around $25,000 of equity in your home.
If you need to borrow more than around $15,000, then chances are you will have to consider some form of secured loan. Borrowers with exceptional credit histories and strong monthly incomes may be able to borrow up to $25,000 on an unsecured basis while those on low incomes or with poor credit histories may have to consider a secured loan for as little as £3,000. There is no ‘typical’ when it comes to choosing between a secured or unsecured loan. Your personal circumstances and the requirements of the lender will drive you towards the options available to you. Different lenders have different outlooks so it is worth shopping around to see who will offer what terms. Be wary, of making multiple applications for loans since each one will register a search against your credit profile. Multiple searches in a short period of time can harm your credit rating and alert lenders to your inquiries making them all a little more cautious.
Since secured loans are more expensive to set up, you can expect to pay a greater administration fee upfront. You may also be expected to pay any property search fees or registration of interest charges. The plus side is that the interest rate charged on the loan should be lower than an unsecured loan due to the additional collateral cover provided.
If you have the choice between a secured or unsecured loan, then you need to do your sums thoroughly to see which is the best for you over the full term. Whilst the rate of interest may be lower on a secured loan, the additional charges may offset the saving in the lower monthly payment.
Remember that a secured loan takes an interest in your home or other property. That means that if you fail to make the payments, you may have your home repossessed by the lender for them to sell, to pay off the loan balance. With an unsecured loan you can only be sued for the balance – your home will not be at risk.
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