Quick loan guide

Taking out a loan is not a decision to be taken lightly. Once you have weighed the factors and decided to take up a loan, the next step is to choose whether to secure it or not with collateral. Collateral is something valuable that the lender will have the right to take from you if you default on your loan. Many people use their homes as collateral which means that non-payment on a loan could mean the loss of your house.

The type and size of the loan you want are usually the deciding factors in whether the lender will require collateral or not. Banks and lenders will be more willing to give you a loan if it is backed against some assets, especially if you want to borrow over £25,000. Again, using your home as collateral on a loan means that missed payments could lead to the repossession of your home by the bank.

Your options for obtaining loans or other forms of finance revolve primarily around the following questions:

• Do you have a home, if so, do you mind using your property as security?

• How much risk do you want to take?

• How much long-term commitment are you prepared to make?

• What are your cash flow needs?

Once you have answered the questions above the loan types available to you will be as follows:

Unsecured personal loan

A personal loan is one which does not require you to have any kind of collateral, such as property, to secure against the loan. Unsecured personal loans generally carry a higher interest rate because there is a greater risk to the lender therefore they are usually a little more difficult to obtain than secured loans, because of the lack of collateral. Conversely, if you are applicable, you will receive the funds much faster.

Key highlights:

• The decision to lend to you is based on your credit rating

• Maximum borrowing is £25,000

• Maximum time for repayment is up to 10 years

Secured loan

A secured loan is money that is borrowed by offering collateral against the value of the loan, such as property. For example, if you are buying a house that has been valued at £200k and you only have £40k right now, you’ll require a loan of £160k to complete the purchase. The lender says, “Ok, I’ll lend you £160k at x% interest to be repaid over 30 years, but if you stop paying me back, I’ll take the house back from you.”

The lender now has a claim on your house as collateral until the debt is paid in full. On the plus side, there is a lower interest rate on secured loans as the lender has a guaranteed way of getting their money back should you default on your repayments.

Secured loans are usually the smartest way to borrow particularly for large purchases, like a house. The interest rate will be significantly lower and it will be easier to qualify. If you are using property as security, another bonus is that it is possible to deduct the interest that you pay on the loan from your taxes. This makes the interest work for you instead of against you.

Secured loans usually take a little more time to finalise because there is more paperwork involved, very often a few weeks to a couple months. Where as an unsecured loan can take as little as two or three days to finalise. If it’s a big purchase and you are not in a hurry to get a loan, the secured option is the cheaper route.

Key highlights:

• You can borrow from £25,000 upwards (the amount will depend on your lender)

• You can take up to 30 years to repay your loan

• Your home can be at risk if you miss your repayments