People who want to borrow money have a few choices to consider. Some will be able to borrow from friends and family, whilst others have to look to financial institutions and businesses for assistance.
There are broadly two types of borrowing – secured and unsecured. Most loan and credit agreements will fall into one of these two, so it’s important to understand what these terms mean and how they could impact you.
Below, we explore these two types of lending and highlight the factors that need to be considered before you agree to either.
What is unsecured borrowing?
Unsecured borrowing is perhaps the more common type of lending available to customers because it has a lower barrier to entry.
This type of borrowing is most commonly seen with personal loans, where financial institutions and businesses lend you money with an agreement to pay it back gradually over a fixed period, including the interest added on top.
These agreements carry more risk for lenders because there is no guarantee or security that the loan will be repaid if repayments don’t go to plan. As such, these loans typically have tighter credit controls and higher interest rates to make the risk worthwhile for the lender.
If you fail to make these payments on time or miss them completely, your credit rating could be impacted and you’re likely to suffer from additional charges. Continued failure to make repayments could result in you being taken to court by the lender.
What is secured borrowing?
Secured borrowing, on the other hand, is a more common type of lending for substantial loans – typically £25,000 and above. These sums are also repaid gradually over time and have interest added on top, but the agreement is fundamentally different.
Loans are secured against assets that you can offer, meaning that if you fail to make repayments, the asset can be sold or seized to repay the debt. This reduces the risk for lenders which means that credit controls are often eased and interest rates can be lower.
Mortgages are a form of secured lending because your property can be repossessed by your mortgage provider if you fail to keep up with repayments. Another type of secured lending is pawnbroking, where customers hand over a valuable item as security for a loaned sum of money. If the loan isn’t repaid, then the pawnbroker will sell the item to retrieve their money.
Which is more suited to me?
The question of which is better comes down to individual circumstances, the lending options available to you and the amount you’re looking to borrow.
If you don’t have any valuable assets then you’re unlikely to be able to take out a secured loan, and even if you do, this depends on if you want to risk those assets for the money you are borrowing. Unsecured borrowing is most likely to be more suitable for you if you’re borrowing a smaller amount and need the money quickly. Secured lending is often more appropriate for the longer term and more substantial agreements, or if you have valuable items that you’re willing to potentially lose
