Why A Secured Loan May Be Better Than An Unsecured Loan

The UK credit industry has surged in recent years with so many loan products available to consumers. Despite the bewildering array of loans, you might summarise them under two fundamental options, secured loans and unsecured loans. Each of these options would have its own advantages and disadvantages.

A secured loan normally requires the borrower's home to be offered as collateral for the home (in this case, it would also be called a home loan or home owner loan - click here to learn more). Tenants, therefore, cannot qualify for secured loans involving property; if they have something valuable (e.g., a boat, caravan), they could use that as collateral. In most instances, when talking about secured loans, the reference is to home loans. Generally, therefore, it is said that only home owners may qualify for secured loans. The home owner might ask, in what situations would secured loans be preferable to unsecured loans?

The lower interest rate is one of the most appealing advantages of secured loans. Since the lender is assured there will be a source for repayment of the loan in case of default, the lender is amenable to a lower rate. You will have to remember, though, that most secured loans have longer terms than unsecured loans. Thus, the total interest you will pay out will be bigger; however, you also have use of the money for a longer time.

Secured loans also allow you to borrow bigger amounts of money. Depending on the free value left in your home, the lender can make available larger sums by applying a multiple, usually 100 percent or even 125 percent. This has been a big advantage in recent years because of huge increases in property values. Home owners who had existing mortgages that they had been paying down for several years suddenly found that there was a substantial surplus on the prevailing market value of their home after deducting the balance left on their mortgage.

The large amounts available to you make secured loans the perfect source for home improvement projects, which will add value to your home. The amounts given for unsecured loans are usually smaller than secured loans, because the lender has nothing else to work with except the amount of your disposable income.

There is a related reason why you might consider a secured loan instead of re-mortgaging the house to raise capital. If you were to top up the mortgage, you may be subject to substantial repayment penalties for early redemption. This may not be something you want to do.

As mentioned, lenders normally allow longer terms of repayment on secured loans. It means you will have a smaller amount going to repayments every month, even if you borrow a big amount. This allows you to undertake costly projects like home improvements without upsetting your budget too much since the longer term coupled with the lower interest rate will keep monthly repayments on the low level. With unsecured loans, you seldom can get terms longer than 7 years, while secured loans may have terms as long as 25 years. A big ticket project to be paid over 25 years will be easy to absorb into your monthly outgoings.

Home owners who have somehow developed a bad credit history will not have to worry much about their poor credit. They can still cash in on the rising property valuations by taking a secured loan against their home. The same advantages would apply to them, with some qualification: the interest rate given to them may be a little higher than to the home owner with good credit, but it would still be lower than interest on an unsecured loan (which they have little chance of getting anyway).