Why An Unsecured Loan Can Be Better Than A Secured Loan

Unsecured loans are also often called personal loans. In a way, there is something oddly appropriate about the term: unsecured loans are basically granted by lenders based on their assessment of the person. That assessment may be made by interviewing the loan applicant, talking with the applicant's employer (if any), and evaluating the applicant's credit report. If the applicant is deemed creditworthy, the lender approves the unsecured loan.

If you want to borrow a relatively small amount of money, and intend to pay it back not too long afterwards, the unsecured loan may be the better option for you, as opposed to a secured loan (which, by the way, is also a personal loan). They are both personal loans because the money can be used for all sorts of things personal.

An unsecured loan is so much easier to arrange, and the money becomes available so much faster. One reason for that is the amount. Since unsecured loans are usually underwritten for smaller amounts than secured loans, the lender finds it much easier to decide whether or not to approve the loan, once the other lending criteria have been satisfied.

The other reason is that the lender only has to evaluate you and your credit history; but with a secured loan, the lender has to obtain a professional valuation of the property. The requirements are less onerous, and there is no need to go into so much detail to arrange security. So, processing time for an unsecured loan is vastly reduced. This also means that arrangement fees will be lower because there are no fees for recording deeds and mortgages in the official registry and other legal fees.

Lenders usually apply a fixed interest rate over the fixed term of the loan. As you may have noticed, if you compare fixed and variable rates at the same moment in time, the fixed rate is generally higher than variable. The lender has to factor in a cushion for fixed rates, because the movement of interest is not certain; in the case of variable rates, it is relatively easier for the lender to adjust rates relative to the Bank of England base rate. Since the term of your unsecured loan is short anyway, the lender figures it will be more convenient both ways to impose a fixed rate.

One significant advantage of unsecured loans over secured loans is that if you run into difficulties in the future and become unable to repay the debt, you are not at risk of losing your home, or at least not immediately. If you should default, the lender may take legal action against you, but that will be a long drawn-out process and will give you time to work out a compromise with your lender.

With unsecured loans, you will get shorter terms. Your total payments for interest over the life of the loan will be less than that for the longer-term secured loans. Shorter terms make you more flexible in switching lenders, as there are no early redemption costs to worry about. You do not have to be tied down to one lender any longer than you have to.

You will have to make sure about your credit history. This is going to be one of the most important bases for granting you the unsecured loan. If talking with you and sizing you up can be termed a subjective evaluation of you as a person, the credit report is the objective aspect of evaluating your fitness for the loan. It must show obvious evidence of good repayment behaviour and adequate earnings to cover the monthly repayments. With secured loans, the credit history is slightly less important because of the presence of collateral.