Loans are broadly categorized into secured and unsecured. Which one you should apply for depends on your purpose of borrowing.
- Secured loans are particularly aimed at funding large expenses like homes, cars, and business expansion.
- Unsecured loans are aimed at funding smaller expenses like home renovation, emergencies and buying gadgets.
- Both types of funding work differently and are available from direct lenders, banks and credit unions.
Here is the difference between both types of loans:
- Collateral
If you are borrowing money to buy a house, car, or other property, you will need to put down a deposit.
- The collateral is, more often than not, worth 10% of the total cost of what you are buying.
- However, in some circumstances, it can go up to 20%.
- It depends on how risky your lender assumes you.
- By putting down the collateral, you are giving the right to your lender to seize your property in case you make a default.
However, unsecured loans are not subject to collateral. There is no need for putting down collateral. In the event of default, you are not at risk of losing property. However, your credit score will suffer if you make a default. Secured loans make no exception.
- The use
The use of secured loans is very restricted.
- You can use the money only for the purpose you are buying for. For instance, a mortgage can be used only to buy a home, not a car or any other gadget.
- However, personal loans in Ireland can be used for multiple purposes.
Your lender will ask you the purpose at the time of filing the application form. However, you can use the money for any other reasons as well without any restrictions.
- Bear in mind personal loans cannot be used for any business purposes.
- Regardless of the type of loan, you cannot use money for gambling, buying securities, engaging in illegal activities, or getting an education.
- Interest rates
Interest rates vary by the type of loan. It will be lower if you secure it against an asset and higher when your debt is unsecured. The interest rates for secured loans are lower because your lender does not have to bear huge risks.
They can take security into their possession and liquidate it to cover their money when you make a default. Interest rates can be even lower if you arrange a larger deposit. For instance, you will get the nod for a more affordable mortgage deal if you pay down a deposit of up to 40%.
Your credit score also decides the interest rates you will be charged. A high credit rating will help you get the nod for a lower interest rate.
Interest rates are higher for personal loans compared to secured loans. Personal loans in Ireland for bad credit are even more expensive because you will be taken to be a highly risky borrower. In the event of falling behind on payments, your lender does not have the security to get their money back.
- Borrowing limit
The borrowing limit for a secured loan is certainly higher. Because you are putting down collateral, it will let you access a large sum of money.
- The collateral cannot be a depreciating asset because your lender will not be able to get their money back in case of a default.
- The borrowing money will be lower for unsecured loans as there is too much risk involved in loaning you money.
The maximum limit varies by lender. You should do proper research before submitting an application form. The borrowing limit will be even smaller if your credit history is not stellar.
You should keep your credit rating in good condition while using an unsecured loan. Most lenders refuse applications from bad credit borrowers. Make sure you borrow money from genuine and honest private money lenders in Ireland. They will charge competitive interest rates after running an affordability check.
Some lenders do not run a credit check especially if you are using a small emergency loan. Such lenders can be a scam. Beware of such lenders. If you do not want a hard credit check, contact a lender that runs soft inquiries.
- Eligibility requirements
Getting the nod for unsecured loans is much easier than secured loans. There are not too many formalities to follow.
- You just need to provide your financial details in the application form and submit your bank statement.
- Lenders will not ask for a bank statement if you are borrowing a smaller sum.
- They will make a decision based on your income and expenditure details.
Secured loans follow the strict criteria.
- You will need to submit the application form first.
- Your lender will ask you to submit your income documents and bank statements as well.
- An inspector will also be appointed to determine the market value of your house if you are looking for a mortgage.
- It will take a couple of days to complete the process.
Upsides and downsides of secured and unsecured loans
| Unsecured loans | Secured loans | ||
| Upsides | Downsides | Upsides | Downsides |
| Less stringent eligibility criteria | Higher interest rates than secured loans | Lower interest rates than unsecured loans | Stricter eligibility criteria |
| No collateral is required | It is tough to qualify for them with bad credit | Higher borrowing limits than unsecured loans | The risk of losing your assets |
| Flexible payments | Defaulting on loan will ruin your credit score. | Flexible repayment terms | There are restrictions on the use of money. |
| Flexibility on the use of money | |||
The Takeaway
Secured and unsecured personal loans are both different.
- Secured loans require collateral, while the latter does not.
- You should be careful about your repaying capacity because both types of loans are expensive.
- Falling behind on payments can ruin your credit rating, and you can lose your assets as well.
- Evaluate your needs and repaying capacity carefully before applying for these loans.
