Secured home loans Vs Unsecured personal loans

With so many different types of loan to choose from it is understandable why first-time borrowers find the prospect so daunting. You know the right loan is out there; it's just a case of finding it. The key is to do as much homework as possible and the best starting point is to decide whether a secured home loan or an unsecured personal loan best suits your needs.

Secured home loans

For many homeowners a secured loan makes shrewd financial sense, especially for anyone wanting to borrow large sums of money over a long period of time. As the loan is ‘secured' against the borrower's property it represents less risk to the lender; which means lower interest rates and lower monthly repayments. Hence secured loans are commonly used to consolidate other debts or for large one-off purchases such as home improvements.

As with all types of borrowing there are potential pitfalls, and with a secured loan it's important to understand that your property is at stake. Borrowers who continually default on repayments could loose their home. Before taking out a secured loan it's essential to work through the figures carefully to establish the overall cost of borrowing. As borrowing terms tend to be longer; the chances are that you'll pay more interest overall. Remember that there are other ways to release equity form your property (see secured loans Vs re-mortgaging); and again it's a case of weighing up the various pros and cons.

Unsecured personal loans

Unsecured loans can provide the right answer for individuals looking for smaller sums. Interest rates and payment terms are fixed, so that borrowers know exactly how much they owe each month and when the debt will be cleared (making them preferable to expensive overdrafts or credit card debts). Interest rates vary wildly; so it's important to shop around.

When considering an unsecured loan it's important to read the small print very carefully. Terms and conditions often stipulate that the lion's share of interest must be paid; even if the loan is settled early. Also look out for financial penalties for defaulting on monthly repayments. Anyone with a poor credit history is unlikely to be offered an unsecured loan or is likely to be charged heavily. If you decide to opt for an unsecured loan; don't fall into the trap of adding to your debt mid-way through its lifespan.