Warning: Late repayment can cause you serious money problems. For help, go to moneyhelper.org.uk. We are a credit broker and not a direct lender.

Explaining the Distinction Between Secured and Unsecured Loans, and Why it Matters

Explaining the Distinction Between Secured and Unsecured Loans, and Why it Matters

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When you need a quick and simple injection of cash, you need a quick and simple injection of cash… right? So, if you are looking to potential sources of such a loan, such as the lenders that we work with as a credit broker at CashCompare, you might not initially give much thought to whether the loan you seek is secured or unsecured.

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But of course, this is a subject you should be giving serious thought. After all, the implications that unsecured loans can have for a given person’s finances and other circumstances, can be greatly different to those for a secured loan.

With no further ado, then, let’s set out the precise ways in which these two loan types are different to each other, as well as potentially similar – and why all of this is important for borrowers to know.

Unsecured Loans: Enabling You to Borrow Without the Need for Collateral

Enabling You to Borrow Without the Need for Collateral

An unsecured loan, which might also be referred to as a “personal loan”, is a loan that allows for the borrowing of a fixed amount, without the borrower needing to put something valuable, such as their home, as a backup in case they end up being unable to fulfil their repayments.

Now, for some of you reading this, the notion that you might lose your house if you fall behind with your loan repayments, may seem brutal. It’s no wonder, you might think, so many people seek unsecured loans in order to bypass this risk.

But for a moment, think about the situation from the lender’s point of view; if they agree to give you a loan, they will have only your creditworthiness and your word as any sort of guarantee that you will pay back the borrowed sum.

Unsurprisingly, then, lenders tend to try to compensate for this lack of security for them, by charging high interest rates for unsecured loans – as much as 1,500% APR in some cases.

Please note, the actual APR may vary depending on your individual circumstances. It's important to consider the risks, such as potentially high-interest rates and the impact on your financial situation if you struggle to repay.

Secured Loans: Potentially Easier to Get, But with the Risk of Losing Your Valuable Asset

Potentially Easier to Get But with the Risk of Losing Your Valuable Asset

So, you can probably deduce from the above what a secured loan is; it is a type of loan that is “secured” against a particular asset belonging to the would-be borrower.

The principle behind such a loan is super straightforward; in the event that the borrower finds themselves unable to complete the repayments, the lender will be entitled to take the pledged asset in order to cover this.

As we mentioned above, the asset that someone applying for a secured loan chooses to pledge is often their home, although this isn’t always the case. They might opt to pledge their car, for instance, or even savings.

With such potentially severe consequences awaiting the borrower if they can’t pay back their secured loan, why would you bother with this type of loan at all? Well, the security provided helps to make a secured loan less risky for the lender. That, in turn, could mean the applicant for such a loan is likelier to be approved, and may not have to pay interest rates at such a high level.

Remember, with secured loans, failing to make repayments can lead to losing your pledged asset, such as your home or car. It's crucial to assess your ability to meet repayment obligations before proceeding.

So, Should Borrowers Apply for Unsecured Loans, or Instead Secured Ones?

Should Borrowers Apply for Unsecured Loans

The short answer to this question is… well, there isn’t a short answer. Much will depend on your particular requirements and circumstances, such as whether you could “afford” to lose any asset you have pledged, and the specific amount of money you would like to borrow (along with the loan’s affordability relative to your income).

CashCompare is authorized and regulated by the Financial Conduct Authority (FCA). Our services are intended to provide you with options without any obligation or guarantee of loan approval.

Are you on the lookout for a short-term loan right now, and would you like to quickly narrow down the possibilities? If so, you could be just a few minutes away from being presented with the optimal deal for you, when you.

Your financial well-being is our priority. If you have any concerns or complaints, please contact us. Always borrow responsibly and consider your ability to repay a loan before applying.

"Warning: Late repayment can cause you serious money problems. Always consider if borrowing is the right option for you and ensure you can repay your loan." For help, go to moneyhelper.org.uk.

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