What is a personal loan?

A personal loan is, generally speaking, a loan intended for personal use. Typical uses for personal loans include funding large purchases (e.g. home appliances), holidays, further education, debt consolidation, etc.

There are two main types of personal loan: secured loans and unsecured loans. Here we take a look at what they mean, and the pros and cons of each.

Secured loans

If a loan is `secured`, it means that there is an `asset` secured against your loan. This asset will be something of value that you own, usually your home, which is used as a guarantee against the loan deal.

Because the asset secured against the loan acts as a potential guarantee, secured loans are considered lower-risk by the lender. Interest rates are usually lower than for unsecured loans, and the amount you can borrow is often higher. Repayments can also be spread over a longer term.

However, if you do not keep up on payments, you may lose possession of the assets, so that your creditors can sell it off and reclaim their money.

Unsecured loans

If a loan is unsecured, it does not have any assets secured against it, and therefore it is widely considered a lower risk to the borrower (but you should still ensure you can afford repayments before you take out any kind of loan).

The flip side of this is that it is a higher risk to the lender, so interest rates are usually higher than on secured loans. They are also typically available in smaller amounts over a shorter period compared with secured loans.

There are still consequences for failing to keep up with payments - usually, this will be court action forcing you to make repayments or face further action (which can result in bankruptcy in extreme cases).

Although unsecured loans are typically more expensive and limited in terms of amounts of money and repayment periods, many homeowners still choose unsecured loans as a `safer` option.

Which is best for me?

As with most things in finance, it depends.

If you are a homeowner with a stable career and a good financial backdrop (e.g. consistent income, no serious debts), a secured loan is usually cheaper, and potentially allows you to borrow more over a longer period, which can make repaying the loan easier.

If you are not a homeowner, you will be unable to obtain a secured loan against your property, so an unsecured loan will be your only option.

One rule applies to both: you should always be totally sure that you will be able to make your repayments before you take out any loan. If you are unsure, speak to a professional loans adviser, who will be able to answer any questions you have about personal loans.

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