Expert loan views & facts

If you are looking for a personal loan, there is a lot to consider. There are various types of loan available, and the differences between each can be confusing.

Here we take a look at the three main types of loan, and who they are most suitable for.

Unsecured loan
An ‘unsecured’ loan is not secured against anything you own – it is granted on the basis of your credit history and your perceived ability to repay the loan.

Because it is unsecured, you are unlikely to lose any assets if you run into trouble with repayments - although you are still liable to legal action if you continually fail to make payments.

Since unsecured loans are a higher risk to the lender, the amount you can borrow and the duration of the loan will be restricted, and interest rates may be higher than with a secured loan. This means repayments will be more expensive than with a cheaper secured loan, and you will pay more in the long run.

Right for: smaller short-term purchases, people without any valuable assets to ‘secure’ against a loan, or homeowners who don’t want to take the risk of losing assets. But remember that unsecured loans can be relatively expensive, and you may still be faced with severe consequences if you fail to keep up on payments.

Secured loan
A ‘secured’ loan is backed by assets – e.g. your home (a homeowner loan), car or another item of value. The assets your loan is secured against are also known as ‘collateral’ in the loan.

If you struggle with repayments on a secured loan, you stand to lose these assets, which the lender can then sell to recover their debt. However, as there is less risk of a loss to the lender, it is possible to borrow more over a longer period, and therefore get a lower interest rate. This means repayments are lower than with an unsecured loan (although repaying borrowing over a longer period may increase the total amount you repay). The lower risk gives lenders more flexibility, so you may still be able to obtain secured loans even if your credit history limits your access to unsecured borrowing.

Right for: larger, long term purchases, homeowners, or people with other valuable assets, who have an impaired credit rating or want a loan with a lower interest rate. But be warned – the risk of losing your assets is not to be taken lightly, and you should be certain you can keep up with repayments before you take out a secured loan.

Debt consolidation loan
If you have multiple debts, a debt consolidation loan can simplify your finances and make planning for the future easier. It works by consolidating all of your debts into a single monthly payment, meaning you repay one creditor instead of many. You may also be able to lower your monthly repayments by spreading them out over a longer period of time (although by doing this you may pay more in the long run).

One common form of secured debt consolidation loan is a debt consolidation remortgage, which involves remortgaging your home releasing extra cash to pay off your debts, effectively repaying them back within your mortgage payments.

This may lead to higher mortgage payments, but it will be much less noticeable than a separate debt consolidation loan.

Right for: people with multiple debts who are looking to simplify their finances and/or lower their monthly payments. A debt consolidation loan can aid your ability to repay your debts – but make sure you can definitely afford the repayments, because the same consequences apply if you miss payments.

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If you are in debt and are considering a debt consolidation loan, it’s essential that you speak to an expert debt adviser before making a final decision. They will discuss your situation with you and talk you through a range of debt solutions suited to your needs.