3.
Secured or unsecured: Which kind of loan is best for me?
Secured or unsecured are the two
options available to most people, although by far and away
most people arrange their personal loans on an unsecured
basis.
Secured loans are - as the name suggests - arranged on
the assumption that the borrower is going to put up some kind
of surety to the lender.
Generally this is the borrower's property. This means that the
lender has the right to take ownership of the asset if you
fail to make the repayments that are due under your loan
agreement.
While most of us would baulk at the prospect of putting our
homes on the line, there are advantages to taking out a
secured loan.
For example, the lender's risk of default is reduced, which
usually means a lower interest rate or perhaps a longer
repayment period.
One of the key differences between secured and unsecured loans
is that it is usually possible to borrow far more by going
down the secured route.
Lenders will consider much higher sums if they know they have
a security over your property and it is possible to arrange up
to £100,000 - but you'll typically need to put the deeds to
your home on the table.
The amount borrowed is repaid monthly over an agreed term
agreed at the outset, which will usually range between three
years and twenty five years.
You may be charged a penalty if you repay your loan earlier
than agreed, and you should check each lender's individual
policy.
But the key issue here is that, when you see that bleak
warning notice 'Your home is at risk if you fail to keep up
with repayments', it really does mean that. Consider therefore
the risk of losing the asset, were you to fall into arrears
with the required repayments, against the advantage of paying
slightly lower regular payments.
It will probably come as no surprise to learn that around 90
per cent of all loans arranged fall into the unsecured
category.
Put simply, you do not have to put up any surety for the loan,
and the lender trusts in you and your ability to repay the
debt.
The rates of interest charged are normally higher or the
maximum loan terms are significantly shorter than those
available for secured loans, but even so, five years - or 60
months - is usually long enough to cater for most borrower's
needs. And if you are able to arrange a loan at less than 6
per cent, then you can see why levels of personal borrowing
are today higher than at any time previously - even during the
consumer boom of the late Eighties.
Most people will prefer to take out a fixed interest rate,
which effectively means it will stay the same throughout the
term of the loan, regardless of any changes in the bank base
rate.
In much the same way as arranging a fixed rate mortgage allows
you to determine your monthly repayments, allowing you to
budget accurately, so does the fixed rate personal loan.
But go for a variable interest rate, and you will find your
repayments will rise and fall in line with any changes to the
bank base rate.
Although lowest APR is one factor that contributes to a
'cheap' loan, you should always pay attention to the small
print as any additional costs will be found there. Remember
also that if your credit rating is not as good as it might be,
lenders will see you as a higher risk and may not offer you
the lowest APR on their personal loan products.
That said, do not be too thrown if you have to pay a slightly
higher APR. The difference between one or two per cent on
repayments spread over three years is very little in the
overall scheme of things.
Some lenders do apply an early settlement charge (also known
as a redemption penalty) if the debt is repaid in full before
the agreed end date.
This can be up to 2 months interest so it pays to check this
out before you commit. If you think you'll clear the debt
before the end of the term then your best bet will probably be
a loan with no early settlement costs, even if the APR is
slightly higher. Whatever you decide, you'll need to do your
sums before you sign on the dotted line.
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