Unsecured loan
An unsecured loan is a form of personal loan from a bank or building society of up to £25,000. The interest you pay on the loan depends on:
- How much you are borrowing
- How long the loan is for
They are ‘unsecured’ in that you can borrow without providing the lender with the right to your assets if you default on your payments. The interest rate remains the same for the duration of the loan, regardless of the Bank of England’s base rate.
Within the category of unsecured loan there are both flexible and fixed loans.
Fixed repayment loan
This is where the repayments are the same each month until the loan is paid off. In general they are cheaper than flexible loans and allow you to plan and budget for the repayment. But if you want the option to pay off your loan early this may not be the correct loan, as there are likely to be high fees for doing so, normally one month’s interest.
Flexible repayment loan
A flexible loan is similar to other loans but the repayments are unique. If one month you have more or less money available to repay you can adjust the repayments. It is completely flexible and allows you the security of knowing the loan can be paid quickly without incurring penalties.
They often allow a delay in your first payment of up to three months. Some even feature a 'repayment holiday'. Where you can stop repaying your loan for up to three months. You will however still incur interest during this period. A flexible loan also offers you the flexibility to pay off the loan in full without a penalty at any time.
In general, the rate you will incur and the hidden interest charges mean a flexible loan will cost the borrower more.
Secured Loan
A secured loan is when the money you are borrowing is secured against a valuable possession of yours, usually your house. It offers the lender some form of reassurance should you default on the repayment of your loan. This form of loan should be seen as a last resort as there is the potential for the lender to forcibly take your security away from you. You should only take out a loan of this form if you are 100% certain that you will be able to make all the repayments.
