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IVA - Individual Voluntary Arrangement

Secured & Unsecured Loans

Taking out a loan is worth considering for larger items for which you do not have the immediate funds and where you would like to spread the cost over a longer period. Common examples are cars, home extensions and house mortgages. A loan can be useful to meet unexpected costs such as when your boiler breaks down and is beyond repair.

In some cases loans are used to consolidate existing debt resulting in one affordable monthly payment. This is one way of addressing a situation where either credit card spending has “got out of hand” or where personal circumstances have suddenly changed resulting in a drop in income. In these situations it is obviously essential to avoid further borrowing until the new loan is repaid or significantly reduced.

Secured and unsecured loans are two very different things, and the consequences of falling behind on payments for either differ drastically. In this article, we’re going to lift the lid on both types of loan and offer some valuable advice for those looking for a lender.

What’s a secured loan?

Often known as a homeowner loan, a secured loan provides lenders with the ability to offer credit agreements which are backed by the equity in a property belonging to the borrower. Therefore, as you would suspect, secured loans are only available to people who own their own homes or business premises. Typically, sums available range from around £5k upwards. The amount you’ll be allowed to borrow depends entirely on the amount of equity in your property and your personal financial circumstances. Sometimes, security can be provided by a third party such as a friend or parent.

What’s an unsecured loan?

Providing you have a decent credit score, you should be able to get an unsecured  loan. Unlike their secured cousins, they are not tied against anything belonging to you and are granted purely on the basis that you are deemed likely to pay back the amount borrowed. Nearly every bank or lender will have some form of unsecured loan on offer, and you can expect to apply for anything from as little as £1k up to around £25k.

Which one is right for me?

If you require a significant sum of money and own a property, the secured loan is cheaper but your home is at risk if the loan falls into arrears. If you require a much smaller amount, we recommend heading down the unsecured route. However, it is also true that secured loans are often the only option to those with poor credit ratings. With little or no credit history to back them up, the house is instead used as a security for the sum owed. Unfortunately, that also means that the house will be at risk if the borrower falls short of the loan’s terms and conditions. Secured loans are inherently risky, unless you are utterly confident you can repay the debt.

Unsecured loans offer a far smaller risk, but the consequences of falling behind on payments with these types of debt shouldn’t be underestimated, either. However, because unsecured loans generally work best over shorter time periods (a maximum of five years is about par for the course), they are often more manageable than a secured loan.

If any loan falls into arrears, if the lender faces a loss of £5,000 or more the borrow can potentially face the risk of bankruptcy in a worse case scenario.

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