How to Choose Between Secured or Unsecured Loans: What are the Pros and Cons of a Secured or Unsecured Loan?

Borrowing money via a loan may seem simple in principle but may be a little harder in practice. Before choosing a lender consumers need to decide whether to opt for secured or unsecured loans. Are there are any qualifying criteria and what are the advantages and disadvantages of these products?

What is the Difference Between a Secured and an Unsecured Loan?

Secured finance is given on the basis that the individual has some form of security that they can use to guarantee their borrowing. This will most often be their home but other items of high value may be used with some products.

Unsecured finance, on the other hand, doesn’t need the individual to “own” anything to borrow money. So, this avenue is open to tenants and to homeowners that prefer not to use their property in the lending process.


What are the Advantages and Disadvantages of Secured Loans?

The fact that a secured loan gives the lender a guarantee that they can get their money if the individual reneges on their agreement makes its terms more favourable in general. The advantages of this product may include:

  • Better interest rates and more fixed rate options.
  • Longer loan terms.
  • Larger borrowing limits.
  • An increased likelihood of approval for borrowing.

But, there are also some downsides to secured lending. The main disadvantages to this kind of loan can include:

  • If the individual does not or cannot meet their loan commitments then they may put their home at risk of repossession.
  • Borrowing over longer terms can also add to the overall cost of borrowing.

If secured loans are not an option or the individual prefers a different route then they can also consider unsecured finance.

What are the Advantages and Disadvantages of Unsecured Loans?

Many favour this kind of solution because it does not involve using their home. Non-homeowners may, of course, have this as their only option. The advantages of unsecured finance may include:

  • Not having to risk using property as a guarantee.
  • Access to quick, often shorter term, solutions for smaller borrowing needs.

There are, however, some disadvantages to this solution. For example, the individual may find that:

  • They stand less chance of getting loans approval, especially if they have an impaired credit history.
  • They may be charged higher rates of interest.
  • They may not be able to borrow high sums for as long a time.

The ultimate decision made will very much be based on the individual circumstances and preferences of the applicant.

Things to Consider Before Applying for any Loan

There are issues to consider before applying for any kind of loans product. The rates offered, for example, may be an issue. Generally, lenders will not give the attractive rates that they advertise to all applicants. These are often held for those with impeccable credit scores.

Those with bad credit issues may, therefore, suffer here. They may, in some cases, not be approved for unsecured lending at all and may have no option but to use secured finance (if they own their own home) or specialist bad credit loans which usually come with much higher interest rates. Trying to clean up a credit history may help improve things.

It is also important to check whether rates advertised are fixed or variable. Fixed rates will stay the same for the life of the loan. Variable rates may increase or decrease over time. If the consumer opts for variable rates they should do so in the knowledge that they can cope with any increases if they do happen.

Those looking to repay existing debts may find that one of these products can help. They may, however, want to check out all their options first to make sure they pick the right one. Impartial debt management advice may also be useful.