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Secured Loans vs. Unsecured Loans

As consumers we all have a credit score which is calculated according to our financial history. A credit score is used by lenders to decide whether a consumer is a 'high-risk' or a 'low risk' borrower. This, in turn, affects the borrower's potential to receive high or low rates of interest on things such as loans, credit cards and mortgages. The poorer a credit rating, the higher the rate of interest the consumer will be charged. Conversely, a better credit rating will probably lead to lower interest rates.

A credit rating reflects of a borrower's ability to make payments on almost any financial commitment such as mortgage fees and credit payments. As a borrower struggles with mounting debt and become less able to make repayments their credit score is likely to suffer accordingly. Thus the spiral of debt becomes seemingly impossible to escape.
                                                                    
Bad credit scores can be reversed by managing your finances carefully, the aim being to honour all outstanding debs. If their credit rating is improved the borrower represents less of a risk to lenders, consequently the chance of lower-interest rate borrowing is improved.

Many homeowners use the equity in their houses to consolidate and pay off their debts, consequently improving their credit score and potentially returning some financial stability to their lives. This is done by taking out either a secured or unsecured loan.

A secured loan is directly related to a consumer's home. The loan is 'secured' against the borrower’s home meaning that, in the event of inability of the borrower to meet repayments; the loan can be reclaimed from the selling of the house.

Because these loans are secured they will mostly be cheaper to manage. It is also possible to borrow larger amounts if your house is being used as collateral as well as the possibility of borrowing over an extended period. Thus, the interest rates attached to this form of loan are comparatively low (Secured Loans from Asda Finance for instance can be paid back over 240 months at an APR of 7.6% meaning you’d pay £795.76 a month - £191,277.40 in total - on a £100,000 loan). Do bare in mind though that the risk of repossession is not one to be taken lightly.

Unsecured loans work in the opposite way. Because the lender cannot secure the loan against a borrower's home, the risk factor for them is increased. Consequently, lenders will inevitably offer considerably higher interest rates, the length of the loan is likely to be limited to a shorter term and less money made available. The remote possibility of the borrower's house being repossessed still exists in rare cases, although, statistically, this is a rarity. If you are thinking about a loan it's a good idea to try a Loan calculator such as the one on the Alliance and Leicester loans website, there will be something similar on most loan provider's websites. They will help you to establish how much you can realistically afford to borrow and what sort of repayment arrangement would best suit your situation.

Before embarking on either of these paths it is worth contacting a debt counselling service. If you're struggling with debts these services offer invaluable free advice and try to manage the situation so that someone in debt and/or with a poor credit history can try and consolidate their debts without risking their home.

If your credit card debt is getting out of hand it really is worth looking for a better deal that might at least save you some money in the short term, look out for good balance transfer rates - there are currently plenty of 0% on balance transfer cards on the market - the RBS credit card offers a particularly good deal with 0% on balance transfers for 13 months, a 2% balance transfer fee and 0% on purchases for 3 months. For an up to date overview of the best offers it's a good idea to check out one of the many credit card comparison sites like uSwitch.  

 



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