What’s the difference between an unsecured loan and a secured loan?
If you’re interested in taking out a debt consolidation loan you should be aware of the two main types of loan – an unsecured loan and a secured loan. You’ll need to consider the pros and cons of each before deciding which one you want to go for.
Unsecured loans aren’t secured against anything – there isn’t collateral if you can’t pay the loan back. This doesn’t mean you can get away with stopping repayments. The lender can take legal action against you if you don’t pay (usually as a last resort).
- there’s no collateral involved - by not securing the loan against one of your assets, you don’t risk losing your house or car if you can’t make the repayments
- there’s flexibility - unsecured loans are generally flexible in length – usually anywhere between one and five years
- you borrow less money – up to around £15,000, meaning you won’t be in as much debt, or for as long a time
- high interest rates - you could end up paying more in interest than with a secured loan for the same amount. This because unsecured loans are riskier for the lender
- you usually need a high credit score - if you have a low credit score you won’t be able to access the best deals, so a secured loan could be an alternative option to consider
- you risk damaging your credit score and incurring late fees if you miss payments
A secured loan
Secured loans get their name from the fact that you secure the loan against one of your assets – usually property or a car. If you stop making repayments the lender can take possession of the asset to claw back owed funds
- low interest rates - due to the loan being secured against something valuable. You’re likely to be offered a lower interest rate, as you pose less risk from the lender’s perspective
- you don’t necessarily need a high credit score - again, due to the security in place, you may not need as high a credit score to get a secured loan compared to an unsecured loan
- you can often borrow more, for longer - with a secured loan you can borrow large amounts and pay the money back over a longer period – potentially making the repayments more manageable
- you could lose your home or car - if you stop making repayments on your loan you could lose whichever asset you’ve secured against it
- there’s less flexibility - generally you need to spread a large amount over a long period of time. Your financial circumstances may change in that time and you could find yourself struggling to make repayments
- you borrow more for longer - borrowing more will put you in a larger amount of debt. If you consolidate your existing borrowing, you may be extending the term and increasing the amount you repay in total
What are the requirements for an unsecured loan?
In order to be considered for an unsecured loan you’ll need to have a relatively good credit score. This is because lenders check your credit score when you apply, to see how risky it’d be to lend to you.
A high credit score and a good credit history will tell them you’re more likely to make your payments on time and in full each month – based on your financial past. Having a low credit score, however, may make them wary about lending to you, as it’ll give them the impression that you’re riskier to lend to.
Read on for 10 quick ways to boost your eligibility.
Don’t worry too much if you have a poor or thin credit history – you may still be able to access credit.
There are financial companies who provide unsecured loans specifically for people with bad credit. Just bear in mind that you’ll have limited options and may not be able to access the best interest rates.
What types of debt can be consolidated?
You can consolidate any debts that can be repaid early under the Consumer Credit Act. These include:
- most types of loans, including secured, unsecured and payday loans
- credit cards
- overdrafts on current accounts
- outstanding utility bills
- unpaid tax
- any debt that’s been passed onto a debt collection agency or a bailiff
If you’re unsure about whether or not your debt can be consolidated you can seek free confidential debt advice from StepChange, a UK debt charity.
How much can you get on an unsecured loan?
Lenders typically let you borrow around £15,000 as an unsecured loan. Although some companies may let you borrow less or more.
The amount you’re eligible to borrow depends partly on:
- which products the company offers
- the lender’s criteria
- your credit history.
If you have a good credit score, you’re more likely to be offered a larger amount at a better interest rate.
What happens if I don’t pay an unsecured loan?
If you stop making repayments on an unsecured loan, there are five steps the lender can take:
1. Charge late fees
If you miss repayments or make them late, the lender can charge you late fees as per the terms and conditions of your contract.
2. Report missed payments on your credit report
Lenders are obliged to report missing or late repayments to credit references agencies. Your credit score and history will be damaged as a result. This can affect your ability to get credit in the future.
3. Chase you for repayments
Creditors are allowed to chase you for repayments via letter and over the phone if you stop paying them.
4. Issue a default
If you miss between three to six repayments the lender can register a default on your credit file, which will stay there for six years (even if it's paid in full). This is a serious negative marker and can put lenders off.
5. File for a CCJ
If you continuously miss repayments after a default has been registered, the lender can file for a County Court Judgement (CCJ). This significantly damages your credit score and sits on your record for six years, unless you pay it off within 30 days.
Note: CCJs are used in England, Wales and Northern Ireland. A different process called enforcing a debt by diligence applies in Scotland.
Should I consider an IVA or bankruptcy?
An Individual Voluntary Arrangement (IVA) or bankruptcy should only be considered if you are in serious financial debt, and you have exhausted all other options.
If you’re considering an IVA or bankruptcy you should seek confidential free legal advice from either a debt charity or Citizen’s Advice first.
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Intelligent Lending Ltd is credit broker, working with a panel of lenders. Homeowner loans are secured against your home.