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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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