Unsecured Loans

Think before you borrow using an unsecured loan

Summary: Don't go into the loan market with your eyes closed. Check it all out and ask yourself what your really need.

When it comes to taking out a loan, it appears that many people don't even know just how long it will take them to pay off the debt. A recent report has shown some interesting facts, including the fact that around 40% of people take out a new loan in order to pay off other loans and card debts and consolidate all these into one simple monthly payment.

Expectations of when borrowers will be able to clear their loans vary according to the reasons for the borrowing. Those taking out loans to cover holidays expect to take more than six months to clear their debt, whereas the purchase of a car would be budgeted for over a longer period - more likely to be three years.

It seems fairly obvious that before taking out a loan of any sort, borrowers would weigh up all the options, but apparently many people just take the first loan they're offered, unaware of the very wide variations in the annual percentage rate (APR). It's very easy to be tempted by an advertisement for "a loan to end all loans" - the "clear your debts, spread the balance over a longer period and make your debts manageable" type of 'ad. Incidentally, according to some recent research, more then 50% of borrowers who take out consolidation loans go on to build up even more debt.

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So what's the difference between secured and unsecured loans? A secured loan is one that is secured by an asset, normally the equity in your home. In the event of you defaulting on the loan, the lender would be entitled to recover the amount owing, plus any costs, by forcing you to either raise the money elsewhere or by the sale of your home. Because the lenders have this security, the risk of them losing out is lessened and therefore they are able to lend at a better interest rate and over a longer term, than with an unsecured one.

With an unsecured loan, no security is offered on the borrower's behalf. This means the lender bears the risk of you defaulting and because of this, the interest rate will be correspondingly higher and the repayment period is shorter. Just because the loan is unsecured, though, it doesn't mean that the lender can't go to court to recover the money. This could mean a county court judgement against you and a negative report against your name. Simply missing a payment will mean a black mark as far as your credit is concerned.

More about unsecured loans
Your home may be repossessed if you do not keep up repayments on a mortgage or any debt secured on it. Security by way of a charge on your home may be required. Think carefully before securing other debts to your home.