Most people will find themselves in need of a loan at one point or another during their lives. The truth is, it’s almost impossible to go through your entire life without any debt. Most of us simply don’t have enough money to get the things that we need to survive. For some people, this may mean that the debt starts early with a university education, whereas for others, their first insight into debt might be a mortgage or car loan.

Before you decide which kind of loan you need to jump into, it’s important to make sure that you’re fully aware of your options. In this article, we’re going to look at the two main types of loan available to any lender:

  • Unsecured loans
  • Secured loans

What’s the Difference Between Secured and Unsecured Loans?

The primary difference between secured and unsecured loans is that with an unsecured loan, you don’t need to use your belongings or assets as part of your application. When you take out a secured loan – often for an amount that’s much larger than anything you could accomplish with an unsecured loan, you’ll offer up an asset, like your house, as security.

What this means is that if you’re unable to pay back the amount you owe for any reason, or you default on your loan, the person who provided you with that loan will have the right to take your property from you, and use it to recoup some of the finances that they have lost.

The amount of risk that comes with a secured loan often means that if you can choose between an unsecured or secured product, you should always go for unsecured. This way, your belongings aren’t at risk if something ends up going drastically wrong.

What is an Unsecured Loan For?

An unsecured loan can come in many different forms. Usually, you’ll be able to borrow an amount between around £1,000 and £25,000 with one of these loans, and the terms will be relatively flexible, but they’re probably not going to be as long-term as a secured loan. Some of the different types of unsecured loan available include:

  • Personal loans
  • Peer to peer loans
  • Bad credit loans
  • Guarantor loans
  • Debt consolidation loans (sometimes)

What is a Secured Loan For?

Alternatively, secured loans are much more likely to come with restrictions on what you can buy, and how you need to spend your money. For instance, you might use a secured loan like a mortgage to purchase a property. Secured loans can allow you to borrow a much larger amount from a bank, building society, or credit union than an unsecured loan. What’s more, these loans often come with longer terms, so you can spread the cost of your loan over years. Some common types of secured loan include:

  • Debt consolidation loans (sometimes)
  • Vehicle finance
  • Bridging loans
  • Home loans or mortgages
  • Logbook loans

Which Loan is Right for You?

Deciding which loan is right for you is a process that will require you to think carefully about the circumstances under which you’ve chosen to borrow money. For example, if you’ve decided to borrow a large amount of money for a long period of time so that you can purchase a house, then you’ll need to get a secured loan.

On the other hand, if you simply want to take out a small personal loan so you can make some improvements to your house, or buy a new car without going on finance, then you might prefer to take out a personal unsecured loan instead.

What Else Should You Think About?

Besides thinking about how much you need to borrow, and how long you need to borrow money for, you’ll also need to consider your credit record. If your credit history is bad, then you might struggle to get your hands on various types of unsecured loan. This could mean that you’re limited to either using a secured loan or turning to options like bad credit loans and guarantor loans. Or maybe even friends and family.

Alternatively, if you have a good credit record then you’ll have plenty of loan options to choose from, and you should be able to get cheaper rates on your interest too. Additionally, you may need to think about why you’re taking out a loan in the first place. While most loans can be used for almost any reason, there are some that will be specifically designed for certain things, like business loans or home loans.