There are two main types of loan available: unsecured and secured. The former offers the lender no security; the latter offers the security of your home. So if you fail to keep up the repayments and have a secured home, the lender has a claim on it.
You might opt for a secured loan if you have a poor credit rating, but you may be able to find a cheaper, unsecured loan if you are prepared to shop around instead.
Most personal loans are unsecured, which means that the lender has no security for your debt. If you fail to make your repayments, the lender doesn’t have the automatic right to seize an asset, such as your home. The lender can pursue you through the courts for an unpaid loan, however, so you aren’t totally off the hook if you don’t pay up.
Unsecured loans of up to £25,000 are governed by the Consumer Credit Act 1974, so are also known as regulated loans. This is not the case with secured loans, which aren’t covered by the Act. The Act strictly regulates how money is lent and ensures that the lender must give you seven days to change your mind about taking out a loan.
On secured loans, your assets, such as property or investments, provide the lender with some security. If you default on your repayments, your lender can take you to court and demand repossession of the property you used to secure the loan.
If the loan is secured against your home, and your home is still mortgaged, the loan is known as a second charge loan.
Secured loans have a lower APR than unsecured loans because they are less risky from the lender’s perspective. They are also easier to come by for this reason. Secured loans are not regulated by the Consumer Credit Act, so make sure you read the terms and a condition extremely carefully before signing the credit agreement, as it is binding. The lender is not obliged to give you seven days to change your mind, as is the case with unsecured loans.
You can usually borrow more on a secured loan as the lender is taking on less risk because it knows it will get its money back if you default. Most lenders offering secured loans will let you borrow up to £50,000 – although some may let you borrow up to £100,000. However, if you need to borrow this much, consider remortgaging instead, as you should be able to get a cheaper rate.
The term of a secured loan can be longer than a secured loan – up to 25 years in some cases. You will be charged a penalty for repaying the loan early, so check with the lender what this is before signing on the dotted line.
Deciding on the term
You can choose how long you want to pay off the loan within the minimum and maximum terms on offer. The longer the term of the loan, the lower your monthly repayments (so if you opt for five years rather than two you pay less each month) but the more you end up paying in the long run. You pay more interest and make more payments over a longer term.
Consider the term of the loan carefully. If you need cash to pay for a dream holiday this summer, for example, do you really want to still be paying it back in four years’ time? But whatever term you choose, make sure it is realistic: Don’t overstretch yourself with massive monthly payments just to clear the loan within a year if there’s no way you will be able to cope.