Consolidation Loan – Secured or Unsecured?

It’s the time of year when we take stock of our finances and the first thing that sticks out is how much we have spent throughout the holiday season. With store cards, credit cards and other loans piling up it seems that a consolidation loan may be the best option to take.

A consolidation loan does exactly what it says on the tin. It consolidates all your loans into one easy and manageable loan. Imagine each month only having to pay one low loan repayment as opposed to all the paperwork involved with the other loans. And throw into that a Direct Debit will only make your life so much easier.

Now that you’ve decided that a Debt Consolidation Loan is your preferred option you need to consider what type of Consolidation Loan will suit you best. So is it to be a Secured Consolidation Loan or an Unsecured Consolidation Loan?

The difference between these two types of loans is significant and you need to be aware of the pros and cons of each one before you take a loan out, so don’t rush into getting a consolidation loan until you fully understand how these loans work and how they will affect your finances.

Secured Consolidation Loan
As the name suggests the secured consolidation loan is secured against something of value. In the UK this security is your property and the amount you can borrow on a secured loan is relative to the amount of equity you have in your property. Your equity or another term used by Lenders is Loan To Value (LTV) is calculated by working out how much you want to borrow and then seeing how much your house is worth and how much your mortgage balance is. This and other factors, such as credit history, are used to determine whether you are a suitable secured loan applicant.

Secured Loan Pro’s
There a number of key pros for taking out a secured loan:

Amount of Loan – With secured loans you can generally borrow an amount from £5,000 to £100,000. Some lenders may even lend you more if you have a very good credit history

Low Interest Rates – As the loan is secured on your property the interest rates are much lower than unsecured loans. This means you end up paying less per month in repayments.
So a loan repaid over 10 years on a secured loan will be much less than a loan paid back over the same period on an unsecured loan

Secured Loan Cons
Although there are a number of advantages with consolidation loans there are a number of reasons why a lot of people don’t use them.

House Repossessed – As the loan is secured on your property then there is a risk that if you don’t keep up with repayments you can have your house repossessed. Although this is highly unlikely you need to consider this seriously, especially if you already have a bad credit history and may struggle to keep up with repayments.

Speed of Loan – The speed of which you can expect to get your loan is a lot slower than a secured consolidation loan. As the loan is secured on your property the lender will make sure that the carry out all the relevant credit history checks and as such the whole process tends to drag along. So if you need to have your money ASAP then a secured loan may not be the best choice.

Unsecured Consolidation Loan
These types of loans are completely different to a secured loan as they are not unsecured on a property. They are sometimes called Personal Loans and in the UK they are also referred to as Tenant loans in certain instances.

Unsecured loans have their own pros and cons and can be a much better option in certain circumstances.

Unsecured Loan pros
Although completely different to secured loans the unsecured loan will suit many applicants.

Speed of Loan – As the loan is not secured on a property the application process is much shorter and as such the consolidation loan can be delivered in a matter od days in most situations. This is ideal if you have a sudden need for a large amount of money.

Unsecured Loan Cons
There are several disadvantages with unsecured loans.

Interest Rates – The interest rates on unsecured loans are much higher than secured loans so you end up repaying a much larger amount of money. Even if you are paying back the loan over a 5-year period the amount you end up repaying is considerable and may even put you into further debt.

Repayment Period – The repayment periods tend to be shorter than secured loans, with some lenders only providing a 10-year repayment period. So your finances can be stressed if you have to pay much higher monthly repayments.

Loan Amount – With unsecured the max amount you can borrow in the UK is £25,000. Over this amount there is more stringent regulation and lenders tend not to provide higher amounts as a result.

Conclusion
A Secured consolidation loan and unsecured loans offer borrowers a good choice of loan and depending on your credit history you can still benefit from either type of loan. For example to consolidate all credit cards debts into one loan will offer the best interest rates and as a result much lower repayments. However with unsecured loans you don’t have to worry about the risk of losing your property plus if you are a Tenant with no house as security then these loans are available to you too.

Article Source: http://www.articles.ask-me-about.com

Paul Hockney is an online financial advisor with advice on saving money on aConsolidation Loan. Offering advice on debt consolidation loans and how to consolidate credit card payments.