Secured and unsecured personal loans - risks and benefits

1 August2011

Personal Loans

A personal loan is simply money you borrow from a lender which you agree to pay back over a fixed period of time. The interest you pay can depend on your credit rating as well as other factors. Your credit rating is based on your history - how you've handled your finances and how you've repaid any money you borrowed in the past. Things that can lower your credit rating include making late payments, defaulting on a loan or a having a CCJ (County Court Judgment) against you.

When choosing a personal loan there are many factors to consider, including the loan amount, the rate of interest and whether or not to secure it against your home. After all, there are two basic types of personal loan: secured and unsecured. Both have risks and benefits.

Secured personal loan risks

  • Secured personal loans are only available to homeowners with enough equity in their home. (Equity is simply the value of the home minus the value of any outstanding mortgage or secured loans.)
  • As the loan is secured against your property, your home could be at risk if you do not keep up with loan repayments. (No lender should lend you more than you can comfortably afford to repay.)
  • Taking out a loan over a longer period of time could make your loan more expensive, as you will pay more interest.

Secured personal loan benefits

  • Taking out a personal loan secured against your home could give you access to larger sums, at a lower interest rate, than if you chose an unsecured loan.
  • You can spend the money on home improvements, a holiday, a new car, or whatever you like.
  • You may be able to repay what you borrow over a longer period of time - reducing your monthly payments.

Unsecured personal loan risks

  • The interest rate attached to unsecured personal loans is often higher than the interest rate you could get with a loan secured against your home.
  • If you stop making payments altogether, your lender could pursue you through the courts. Eventually you could receive an 'attachment of earnings order' - where they take loan repayments directly from your salary, or a 'charging order' - where an unsecured debt is secured against the equity in your home.

Unsecured personal loan benefits

  • You can choose to repay your loan quickly, meaning you'll pay more each month, but less interest overall.
  • As these types of personal loan aren't secured against property, they are available to people who don't own a home - as well as homeowners who don't want a secured personal loan.
  • You can spend the loan money on whatever you like.

Before you choose a loan, you should have a clear idea of your income and expenditure - and be confident you can afford the loan repayments. Also consider whether your circumstances might change during the repayment period - and whether you could still afford the repayments if things did change.

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Tags: loan, loans, secured loans, unsecured loans, personal loans, CCJ, County Court Judgement, credit rating, loan repayments

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