Personal Loans vs. Secured Loans - Which is Right for You?

Monday, August 25, 2008

If you’ve reached the decision that you need to take out a loan, but are unsure of what to look into first, then it’s a good idea to start with a key decision – do you go for a personal loan, or a secured loan? Each is suited to its own specific purpose and has its own conditions and restrictions. It’s important that you understand the difference between them and what they both entail before making any big loan decisions.

Personal Loans. Personal loans are unsecured loans; that is they are not secured against any of your assets. Because of this, the annual percentage rate (APR) is can be quite high on a personal loan, as the lender is technically taking on more of a risk in lending to you. Most personal loans cover up to around £25,000, with repayments up to a maximum of around 7 years. Personal loans are good for non home owners, and rely mostly on your having good credit history (i.e. you haven’t failed to meet payments on a previous loan).

If you’re considering getting a personal loan, but aren’t sure exactly how to go about it, it’s best to bear a few things in mind. APR on personal loans can often change unless you have a flat rate loan, so beware being overly optimistic regarding repayments. If you’d rather feel more secure about your repayments, banks like NatWest offer deals on fixed-rate personal loans, and most banks now give you the option of personal loan protection – an additional sum that you pay which will sort out any payments that you fail to meet due to illness, accident or involuntary redundancy.

Secured Loans. Secured loans are aimed largely at home owners, as the loan is guaranteed against your assets (generally your home), meaning that if you fail to meet a repayment on your loan then your assets can be seized by the lender. Because you are putting such a valuable asset up as a guarantee to meet repayments on your loan, secured loans generally allow you to take out a greater sum of money than personal loans. For example, Alliance & Leicester’s secured loans go up to £100,000, whereas ASDA offer homeowner loans for up to £150,000. Unsurprisingly, you are also given more time to pay your loan back, with repayments spanning up to 25 years. Naturally, this means that a secured loan is not to be taken lightly – it’s quite a commitment that will be with you for a considerable amount of time. However, if you are certain that you can afford to meet repayments quickly and fully then it’s worth considering. You can also generally choose to repay your loan early if you have the means, however most lenders will ask for an early repayment charge.

When it comes to basic differences, the answers are clear. Secured loans are for homeowners, personal loans aren’t. Secured loans can be for more money and for a longer term than personal loans. However, if you are choosing between the two, it is best to fully consider what is best for your situation and do thorough research before making any final decisions.

The Samaritans can give you free debt advice.

Prices and products are correct at the time of writing (30.05.08) and may be changed at the discretion of the provider.