Do you know the difference between unsecured and secured loans? If not, you’re in the right place. Find out what type of loan falls under which category, right here.
When you’re looking for a loan, sometimes all the technical jargon lenders use can really throw you off. You may leave with your head spinning, wondering what type of loan you should get. Bank loan, payday loan, guarantor loan – all of them sound different, but the truth is loans fall under two main categories.
In this post, we’re going to talk all about the two different kinds of loans. Unsecured and secured loans are the two types of loans in the UK. They have different meaning and all loans fall under those categories, and you’ll find out all about them in this post. For all the essential information on both secured and unsecured loans, stick right here and read our blog!
Secured vs. Unsecured
These two types of loan govern most UK loans. They are how lenders categorise the type of loan they give out. Let’s start with secured first:
A secured loan is one that requires you to put collateral up against the money you borrow. This can be your property or even your possessions. This is the way lenders assured they receive their money back in full. Because, if you’re unable to pay, your house and possessions could be repossessed in order for the bank to settle. These types of loans are riskier, because they could leave you without a home.
Unsecured loans, as you may have guessed, are the exact opposite. An unsecured loan does not require anything as collateral against the loan. Dependent on the lender, if you’re unable to pay, you may see a rise of interest rates for late repayments, or even fines and legal charges against you. There is no agreement in a loan that states your possessions will be up as collateral – as an unsecured loan isn’t secured with your property or possessions.
These two types of loan are the ‘parents’ of loans within the UK.
Common Types of UK Loans
Here, you’ll find a list of the different types of loans, and whether they are secured or unsecured. Let’s get into it:
- Guarantor Loan
A guarantor loan is a different kind of unsecured personal loan. It’s one that doesn’t rely on your own personal credit score. All you need is someone to support your application, and sign to agree that should you be unable to make repayments on the loan, your guarantor will cover it for you. The loan is guaranteed to be repaid, by the guarantor. Which means that these loans are classed as unsecure.
When it’s time for you to buy your own home, you’ll approach your chosen lender (be it a mortgage broker or bank etc.) and put down a deposit to borrow a secure loan. Mortgages are loans that are secured against the property, because should you fail to make repayments on your mortgage, the bank/lender will repossess your home, in order to have their investment back. Because your bank possesses the ownership of your home (until the mortgage is fully repaid) they have the ability to repossess your home.
- Car Finance
Some dealerships offer car financing. It’s a form of paying monthly in order to secure your own car. However, these car financing schemes are usually classed as a secureloan. Because, if you’re unable to keep up with the repayments of your loan, it means that your car will be repossessed by the lender/dealership. Technically, like a mortgage, you don’t own anything until the loan is repaid in full.
- Payday Loans
Payday loans are fast pay-out, high risk loans. They’re unsecuredloans, because the way they ensure their investment is returned is different to other forms of lending. Payday loans are meant to be a way of borrowing money, until next payday (clue is in the name). Which means, that the interest rates, month to month are fairly low. However, the annual APR is something you need to watch out for. If the loan is left unpaid, it means that the interest rates can sky rocket. The annual APR on a typical payday loan can be 1000% and higher. Whilst they are unsecure they could land you in a hell of a lot of debt.
- Student Loans
When someone applies for university, in order to fund their time studying, the government offer student loans. These types of loan are unsecured because the loan is only repaid back when the borrower earns over a specific amount. Student loans are low risk loans, but only open to those studying at university. Based on their parent’s income, students will receive a maintenance loans, to pay for rent, food etc. and a course loan (to pay for their tuition fees).
- Credit Cards
When you apply for a credit card, you’re allotted a certain amount of credit to spend each month. Credit cards are considered as unsecured loans because you’ll pay interest on anything you spend. However, there is nothing in the contractual agreement that states you must secure your property or possessions against the loan.
As you may be able to guess, secured loans are slightly easier to land – due to the fact that they’re more beneficial for the lender. Whilst your credit rating may affect the rates you get, secured loans are usually considered slightly easier to get. But unsecured loans are largely dependent on your credit rating (with the exception of guarantor loans and payday loans). Because there is not security for the lender, they’re more reluctant to offer unsecured loans to borrowers.
And that’s pretty much it! Almost every loan in the UK falls under these two categories, and as you can see, there are many different common types of both secured and unsecured loans. When it comes to finding the right loan for you, it’s ideal to weigh up the risks and your credit. Payday loans are unsecured, which means your property or possessions will be fine, but the rising APRs annually could land you in serious debt. Guarantor loans are ideal for those with bad credit. These are low risk loans, as they’re unsecured, and don’t require you to have good credit. So, before you take out a loan, know the differences! Unsecured and secured loans – the two categories of loans available in the UK.