A Quick Guide to Secured and Unsecured Debt

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A Quick Guide to Secured and Unsecured Debt
Debt is debt, right? Well, yes and no whilst
owing money is debt, there is secured debt and
unsecured debt, both of which have their pros and
cons. In some cases, you may not be able to
access unsecured debt as lenders need collateral
to lower the risk of lending money to you. In
other cases, there is a limit to the amount of
unsecured debt you can have. If youre not sure,
heres our guide to secured and unsecured
borrowing explained. As of April 2021, the daily
value of secured loans in the UK had increased by
around 5, totaling 77.6 million of secured
debt. 3 out of 5 people were taking out a secured
loan for home improvements or debt consolidation,
or both. Thats a hefty level of debt in one
month that is secured against one of your assets,
usually your property. With the average adult
debt just over 30,000 (including mortgages but
not including student loans), you can see why
people are wanting to consolidate the debts they
have and aim for a lower rate of interest.
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There are two main types of debt, secured and
unsecured, but whats the difference between the
two, and how much impact will it have on your
finances? What is secured debt? Secured debt is
money borrowed against one of your assets, such
as a car or your home, as security for the
loan. For example, your mortgage is a secured
debt against your property which means that your
mortgage provider owns part of your house until
you have repaid the debt. The remainder of the
property you own is called equity however, if you
cant pay back your secured loan to your mortgage
provider, they are able to repossess your
home. The same principle applies if you secured a
loan, usually from 10,000 upwards, against your
car, for example, your loan provider is entitled
to take possession of your car if you do not keep
up repayments on the loan. A secured loan has a
lower risk for the lender because they can
recover the asset youve put up as security. The
problem is they are riskier for the borrower as
they will lose their asset if they dont pay back
the money. Pros and cons of secured
debt? Pros Generally, you can borrow a larger
amount of money, for example, 10,000 or more
than you would be able to with an unsecured loan
The interest is usually lower than an unsecured
loan If you dont have a good credit history or
are self-employed, you are more likely to be
accepted for a secured loan. Cons Because the
debt is secured against an asset, such as your
home, car, or jewelry, you may lose it if you
dont keep up with repayments The loan period is
often much longer than unsecured debt, such as
10, 20, or 30 years Even if you have a fixed
interest rate initially, once it goes to a
variable rate of interest, your monthly
repayments are likely to fluctuate Some lenders
charge arrangement and management fees There may
be exit fees charged if you want to pay off the
loan early, i.e. before the end of the loan term
If you dont keep up repayments, it will affect
your credit score.
What is unsecured debt?
Unsecured debt is a loan that isnt secured by an
asset, such as a personal loan, from a bank or
other financial provider. You can borrow an
amount of money and agree to make regular
payments until the loan is paid back, including
interest charged by the lender. The interest rate
on unsecured debt is often much higher than
secured debt because there is no asset secured
against the loan. Therefore, the lender is taking
more of a risk in lending money to the
borrower. Whilst you dont lose an asset if you
dont keep up repayments, you will probably be
charged additional interest, the lender may apply
to the court to get their money back, and it will
definitely have an impact on your credit
rating. Pros and cons of unsecured
debt Pros There is greater flexibility and
repayments are usually between 1 and 5 years No
collateral is required as security against the
loan There are usually no exit fees if you want
to pay off the loan early. Cons The interest
rate is much higher and therefore, your monthly
repayments are higher Not keeping up repayments
will negatively affect your credit score Lenders
can apply to the court to get their money
back There is usually a limit to how much you can
borrow.Fixed and variable interest ratesBoth
secured and unsecured debt can have fixed or
variable rates of interest. In most cases of
secured debt, the interest rate will be fixed for
a certain period of time, such as 3 years or 5
years, ensuring you pay the same amount each
month no matter what happens to the Bank of
Englands base rate.The majority of unsecured
loans come with a fixed interest rate but it is
usually much higher to allow for variances in the
base rate of interest. For example, credit card
debt, which is unsecured, tends to have a high
rate of interest but doesnt change if the base
rate goes up or down. Whether you are opting for
secured debt or unsecured debt, the lender will
conduct a credit check on your name to satisfy
themselves that you are most likely to pay back
the debt. Therefore, if you have a low or bad
credit score, you will either be paying a much
higher interest rate because the lender is taking
on more of a risk lending to you, or your
application may be refused. Whilst the interest
rate on secured loans is often much lower than on
unsecured debt, the stakes are much higher if you
are not able to pay it back. It will also
severely affect your credit rating, making it
much harder to borrow money, rent a property, or
even a mobile contract agreement in the
future. We hope our guide to secured and
unsecured borrowing explained has been helpful
but if you are not sure about your secured and
unsecured debt and need advice on how to manage
your finances, personally or for a business, the
first step is to seek professional advice. Our
highly experienced professionals at Leading UK
are on hand to help and advise you at any time.
By Viv1 December 15th, 2021 Business Rescue
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