A secured loan is the borrowing of a sum of money whilst putting up collateral as security against defaulting on repayment. An unsecured loan is essentially the same with the key difference being the lack of any required collateral. Unsecured loans are more immediately attractive as they do not involve putting any property at risk; however this does not mean that there is no risk attached to taking out an unsecured loan at all.

Unsecured loans are ideal for tenants and those who do not own their own homes. This is because it is traditionally the borrower's home that is used as collateral in a secured loan, if you do not own your own property then you cannot use it as security. If you can prove via bank statements and payslips from your employer that you have a steady income then this should be enough to get you an unsecured loan. However if you have a bad credit history or County Court Judgements in your past you will have a much harder time, as there is evidence of you defaulting on previous payments. This makes you a far higher risk to a prospective lender and may result in you being turned down for an unsecured loan.

Another advantage of unsecured loans is that they can be put into operation more swiftly than loans that require security. Because there is no collateral to be analysed and evaluated the process does not get bogged down in paperwork and legalese, and this means that there is a lot less to sort out before the policy comes into force. Consequently, people who are after a fast loan would be best advised to seek out one without security.

A secured loan may at first appear to carry few benefits compared to its unsecured counterpart; you are actively putting something of yours on the line and it takes considerably longer to activate. But there are pros to be found on the side of secured loans. For example, unsecured loans can be a lot costlier. The amount available to borrow has similar parameters to those of a secured loan, roughly £1,000 up to £25,000, but the Annual Percentage Rate is likely to be substantially higher. The lack of collateral has disadvantages as well as advantages, and the lender has to guard against payment default in some way. Since there is no physical security in the form of property they have to raise the level of interest instead. This is something that a lot of people do not take on board in the excitement of getting an unsecured loan but it could mean a substantial difference in the amount that you are required to pay back.

The schedule of repayments is another factor to consider when weighing up the two options. Whilst there may be a general similarity in the timescale between unsecured and secured loans it is far more likely that you will be able to negotiate a secured loan with a longer repayment period than it is an unsecured loan. Again this comes down to the issue of collateral. If you are willing to put your house on the line for the sake of a loan then the lender is more convinced of your integrity and ability to repay the money. Consequently they will be much more amenable to the idea of giving you more time to do it. With an unsecured loan the absence of security for the lender makes them more nervous about granting you favours and special dispensations, and means that you will be tied in to a very strict pattern of repayments.

However the most important thing to bear in mind with unsecured loans is to make sure that you take them seriously. This may sound like an odd piece of advice but there is a lot more motivation to repay a loan when you stand to lose your property should you default. Just because there is no physical object on the line with an unsecured loan it does not mean that you can get away with defaulting on repayments. Exactly the same laws apply on an unsecured loan as they do on a secured loan and you can lose just as much if not more by reneging on the terms of the agreement. As well as the financial cost your credit history will be shot and those dreaded County Court Judgements will start to appear on your record. These factors combined will make it nigh on impossible for you to get any kind of loan in the future. So make sure that you don't get too complacent with an unsecured loan and remember what you stand to lose.

Whilst it may at first appear that an unsecured loan is far preferable to a secured one, there are pros and cons on both sides based on the lender's faith in your ability to repay.