To understand the difference between secured and unsecured personal loans it is helpful to consider the factors that banks take into consideration when making decisions on loan applications.

The most important factor is the applicant’s overall credit history, followed by their current income and level of debt. These factors are taken into consideration in deciding what level of risk the person poses to the bank. If the applicant does not meet the acceptable levels of risk for an unsecured loan, it is likely that they will be asked for some form of security against the loan, usually a personal asset such as their home or car.

As a consumer, it will be important to consider whether to apply initially for a secured or an unsecured loan, taking into account the positive and negative aspects of each type of loan, and your own financial and personal circumstances.

Banks normally offer lower interest rates on secured personal loans, as the risk to them is reduced. If the borrower defaults on the loan, the bank can take possession of the asset used for security and sell it to pay off the outstanding balance. If you are a good financial planner and are confident of being able to meet the loan repayments, this might be the best option as the lower interest rate will save you money over the course of the loan.

In the case of unsecured loans, interest rates tend to be higher regardless of the borrower’s financial circumstances, as there is no fixed asset securing repayments. Unsecured loans are usually only approved for applicants who are in secure and stable employment, have a good credit rating and are not perceived to pose a financial risk to the bank. The main advantage to the borrower is that they do not risk losing their home or other assets if they fail to keep up the repayments.

If you are considering which type of personal loan to apply for, it is advisable to investigate the products available from a range of different lenders, taking into account interest rates, repayment amounts, additional fees and any terms and conditions. Discuss your own personal circumstances with the lender and seek their advice on the most appropriate loan for you.