Sometimes in life, we can find ourselves in unexpected situations. This could mean emergency expenses that we are not prepared for. Maybe your boiler has packed up or your car needs a repair with a cost that you can’t cover, and payday is still a while away. If you need funds urgently, there are options such as payday loans and short-term loans that can help. They are designed to get you to payday and can be repaid over a fixed period. If you need cash in an emergency, a payday loan could be an option for you.
These loans are classed as unsecured loans and often have high-interest rates, but what does this mean for you, and what is the difference between an unsecured and a secured loan? We’ll explore this below.
What is a secured loan?
A secured loan is a loan that you put something down as security on when taking out the loan, for example, your home. If you don’t put property or your car down to secure the loan, then it makes it unlikely that you would get one. Secured loans help to give the lender extra security but don’t come with a lot of advantages for the person taking the loan out. If you use your home for security against the loan, for example, the lender can apply for a court order to sell your home if you can’t pay the loan back.
What is an unsecured loan?
An unsecured loan is, quite literally, the opposite of a secured loan – it is not secured against the borrower’s property. An unsecured loan comes at a higher risk to a lender as there is no guarantee for them that comes with a borrower not being able to pay the money back. They can be a useful option and are often quick to arrange. Before you decide to take out an unsecured loan, it is best to plan a monthly budget that includes your loan repayments to make sure that you can meet them.
What’s the difference?
- Secured loans are based on having property secured to them when applying, such as a house or a car. This is so that lenders can sell them if you can’t make the repayments.
- Unsecured loans don’t need to have property secured to them. You should calculate to make sure you can meet the repayments before you apply, but unsecured loans will never end up in your losing your home because you can make the repayments.
- Secured loans may look appealing as they’re more likely to lend to those with poor credit scores because they are being provided with security in the form of possessions.
- Unsecured loans are often cheaper if you have a good credit score, a lower credit score means higher risk for the lender and therefore a higher price.
Secure loans are very risky as the inability to make the repayments can result in serious consequences. If you’re in urgent need, an unsecured payday or short-term loan is the better option, but you should ensure you’ve done your research before choosing to apply.
