Do you need a secured or an unsecured loan?

Deciding to get a loan is an important decision, because it may tie you into a financial commitment for a number of years.

If you are a homeowner, the first thing to decide may be whether to go for a secured or an unsecured loan. The difference between them is that secured borrowing means that the lender can step in and sell you house to recover the debt if you miss enough repayments.

Advantages of secured borrowing

The advantages of secured borrowing may include:

• lenders may offer a more attractive rate of interest (compared with unsecured lending) because they have recourse to your house if you default;
• you may be able to borrow money over a longer term than with unsecured lending; and
• you may even be able to add extra borrowing to your existing mortgage.

Advantages of unsecured borrowing

On the other hand, you may wish to consider unsecured borrowing because:

• you may be able to get a shorter term arrangement, if that’s what you want;
• you may have more flexibility about making an early repayment; and
• an unsecured advance may not put your house at risk.

Other factors to take into account

Aside from the decision about whether your borrowing should be on a secured or an unsecured basis, you may need to bear the other things in mind that may typically apply to a lender. For example, what will the interest rate be? There are a number of different ways to calculate interest rates, including rates that remain fixed for the duration of the borrowing and rates that may vary in accordance with how the Bank of England’s base rate behaves.

Most of the online loan applications will provide a loans calculator so you can get a guide to what the costs may be.

You may also wish to take into account the flexibility that different lenders may offer. For example, are you able to “borrow back” any of the amount that you have repaid? Might you have access to more funds to borrow should you need it?

Finally, you may wish to pay attention to your credit rating before you apply for a loan. It may be worth making sure that your repayments are all up to date so that you can present yourself in the best possible light. You can check your credit history by getting a copy from Equifax (www.equifax.co.uk) or Experian (www.experian.co.uk).