Secured Vs. Unsecured Loan: Which Is Better For Households?
Have you ever wondered how much collective debt UK citizens owe?
As of June 2022, this number totalled £1.8 trillion, with a staggering £1.6 trillion of this accounted for by secured mortgage debt.
The remaining £203.9 billion is unsecured consumer debt, which includes the amounts borrowed largely in the form of loans and credit cards.
As you can see, the total amount owed by UK households is split unevenly between secured and unsecured loan agreements.
But what do these loan types describe, and which one is right for you?
What is a secured loan?
Secured loans account for the majority of outstanding household debt in the UK, with this type of arrangement describing money that you borrow against an asset that you own (typically a house or car).
As secured loans are usually leveraged to purchase high-value assets that can be used as collateral, interest rates tend to be considerably lower when compared to unsecured loans.
This is a common advantage of secured loans, as is the fact that you can usually borrow considerably more through this type of arrangement (depending on the value of your collateral and your credit score, of course).
The danger here is that failure to meet your monthly repayments could lead to the asset being repossessed, with is a prominent risk during periods of recession or economic contraction.
What is an unsecured loan?
Unsecured loans are loans that aren’t secured and don’t require you to provide any kind of security or collateral.
Similarly, such loans tend to be generic, as they have no fixed purpose and aren’t typically used in conjunction with a high-value purchase.
However, their unsecured nature and the lack of collateral mean that lenders tend to hike the interest rates associated with such loans, to offset their greater risk in the event of missed or continually late payments.
You may also have limits in terms of how much can borrow through unsecured loan agreements, with this once again due to their increased risk proposition and the lack of security involved.
What loan option is better for you?
Loans are easy and convenient way to get the money you need without having to sell any assets.
While I don’t endorse payday loans, there are some types of loans that are worth it.
Namely – loans that could help you make more money (i.e positive loans).
Positive reasons to get a loan are business loan, home renovation (this adds value to your property), big-ticket emergency repairs (only if your emergency savings cant pay for it), and medical emergencies.
I don’t recommend taking out a loan for indulgences such as weddings, anniversary parties, holidays, buying designer clothes etc. These events should be planned for in advance.
But which types of loans should you use – secured or unsecured?
Generally speaking, for big-ticket long-term loans like mortgages, it’s best to use a secured loan, as the interest is low and manageable long-term.
I don’t recommend using unsecured loans as your first option. Try to borrow money from a family member or a close friend first.
If you really have to go for an unsecured loan, make sure the interest rate is manageable and you can be 95% sure you can pay it off within the agreed time frame.