Secured Loans Vs Unsecured Loans

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The current credit crunch is really starting to bite for those seeking unsecured loans. Lenders are becoming increasingly reluctant to lend money because of the increased likelihood of redundancy and resultant unsecured loan default.

Research by uSwitch.com revealed that consumers taking out ‘best buy’ unsecured personal loans could expect to pay £1.2 billion more in interest than they would have if they took out the same unsecured loan just a year earlier. In the past 13 months, average personal loan rates have risen from 6.1% APR to 7.4% APR for those with good credit.

Can someone with Bad Credit Take Out an Unsecured Loan?

A poor credit history can make it virtually impossible for a borrower to get an unsecured loan or tenant loan. The current state of the economy, combined with an adverse or bad credit history, often renders the borrower too high a risk for many lenders.

The only unsecured loans available to those with bad credit tend to be at a higher rate of APR from a reduced range of adverse credit lenders. Others find that their poor credit history only permits them to borrow from loan sharks or doorstep lenders.

Typical bad credit unsecured loans tend to charge a rate of APR in the region of 50-60%. Whilst monthly payments start out as affordable, a lot can change over the course of a 5 year loan. The higher rates of APR on these unsecured loans mean that a borrower is paying predominantly interest over the loan term.

Is a Secured Loan the Better Option for Someone with Bad Credit?

Provided the borrower has sufficient equity, it may be possible for someone to take out a secured loan on their property. Secured loans usually allow a borrower to be able to borrow higher amounts at an enhanced rate of APR because the bank has collateral.

The major problem with secured loans is that those that cannot keep up with monthly repayments could find that their home is repossessed. Many lenders will only allow a borrower to fall up to 3 months behind with their repayments before commencing repossession proceeding.

Unlike with unsecured loans, it isn’t possible to utilise a debt solution when a borrower encounters financial difficulties. Those struggling to keep up with repayments on an unsecured loan can utilise a debt solution, such as a Debt Management Plan or Individual Voluntary Arrangement (IVA).

Before someone with bad credit takes out a personal loan, consider whether the purchase is really necessary. Many unsecured loans won’t be feasible meaning that the rate of APR will be high. Secured loans are available for those with sufficient equity, but they are risky.

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