What is the difference between a secured and an unsecured loan?
Find more articles like this in our Info Hub – A secured loan means that you borrow a sum of money and put up something of value as security – usually your home.
Therefore, an unsecured loan is unattached to any asset that you own.
When you get a loan from a bank or a loan from a credit union – they are typically unsecured loans in the same way that credit cards, catalogues and bank overdrafts are also unsecured lending types.
Two other types of unsecured loan types are payday loans and guarantor loans, both of which have come under heavy criticism in recent years for mis-spelling.
Lastly, another unsecured loan is a student loan – The student loan repayment arrangement varies due to the particular payment plan you are on.
A secured loan against a car is usually refered to as a logbook loan and some ‘rent-to-own’ lenders exist(ed) such as Brighthouse, allowing an individual to purchase goods on a secured loan basis.
With a secured loan, if you do not keep up the payments, the lender can sell the item used as security, even if that means leaving you homeless.
With an unsecured loan debt, if you don’t keep up the payments, the lender can take action in the courts to get the money back. More commonly, and before it gets to that stage – they will serve a default notice against you as per the terms of Consumer Credit Act of 1974.
A default will impact your credit rating and more likely result in them passing the unsecured loan debt onto a debt collection agency to collect on their behalf.
If it does end up in court, you will usually be ordered to pay off the loan in regular instalments set at an amount the court decides you can afford.
The lender can use a range of other measures if you do not make the payments in line with the court order.
It is more common for local authorities to pursue you for enforcement actions such as wage arrestments in Scotland, however, this is very far down the line of non-payment of your unsecured loan debt.
If you currently have an outstanding wage arrestment claim issued against you, you can investigate the use of a Statutory Moratorium to buy yourself more time and give you some breathing space.
If the wage arrestment has already been processed and your employer is taking a deduction from your wage – give us a call on 0141 221 0999 and we’ll review your Scottish debt help options with you.
The APR% of a secured loan is usually more favourable than an unsecured loan because lenders run fewer risks of not getting their money back.
An unsecured loan will generally cost you more, but there’s no danger of losing your home if you can’t keep up the payments.
What Are Debt Consolidation Loans?
Debt consolidation loans are a single loan taken out to replace your other debts, however, are they the best option available for restructuring your finances?
Taking out a consolidation loan when you are already in severe debt might not be the best option for you. You may need to consider other aspects. Think about:
Cost:
Is the interest rate very high?
Will the new debt consolidation loan really save you money?
Security:
Is the loan secured against your home or car?
If so, you could risk losing your home/vehicle if you fail to keep up the payments on the consolidation loan?
Other existing debts:
Make sure the consolidated loan covers all your existing debts except those which have a lower APR than the consolidation loan.
Otherwise, you could find yourself having to pay back loans you had forgotten about at a time when you have already overcommitted yourself by paying back the debt consolidation loan.
New debts:
Once you’ve consolidated your loan, don’t build up new unsecured debts elsewhere.
Cut up your credit cards so that you can’t use them.
Secured vs Unsecured Loans – How much is too much to borrow?
Before taking on any new borrowing from an unsecured loan or a secured loan, think carefully about whether you will be able to afford the new repayments on top of your existing ones and think about what would happen if your circumstances changed.
To help you do this, draw up a budget taking into account how your income and spending are likely to change over the lifetime of the loan.
Also look at how much you will pay back in total – multiply the monthly payment by the number of payments – You may be shocked.
Recalculate your budget as if you had already taken out the loan. Do the results now suggest you’ll run into problems?
Calculate the effect of a change in interest rates on your mortgage.
Think carefully before you borrow more to try to get out of a problem.
A new loan may appear to help for a time but will make matters worse if you run into problems repaying that loan too.
Check out budget and loan calculators to understand the real impact of your borrowing.
And get advice to help you sort out the root of the financial problem.
Debt Consolidation without borrowing?
Depending on your situation and how much you owe – it’s possible that an unsecured loan or secured loan may not be the best way of managing your unaffordable financial difficulties.
If you reside in Scotland and have unaffordable debts; you may qualify for the Debt Arrangement Scheme. The DAS in Scotland uses government legislation that allows you to enter into a formal debt management solution which freezes all interest and charges.
Find out more about the advantages and disadvantages of the Debt Arrangement Scheme.
In addition to the Debt Arrangement Scheme, if you owe more than £5,000 to two or more unsecured creditors, you may qualify for a Trust Deed, which also uses legislation to write off some of your unaffordable debt and allows you to enjoy a brighter future after a typical period of 48 months.
Find out more about the advantages and disadvantages of Trust Deeds and how Trust Deeds work.
Depending on the severity of your financial difficulties – you may also qualify for Sequestration – the Scottish insolvency equivalent of Bankruptcy.
There are pros and cons to each but the outcome has the same goal; affordable debt repayments that allow you to put your financial difficulties behind you.
In order to make sure you’re given the best advice on debt consolidation with our without further borrowing, we would always advise that you seek expert debt advice.
Trust Deed Scotland® can be reached on 0141 221 0999 or you can contact Trust Deed Scotland via an online enquiry form, email, or in person* however, we recommend trying our Trust Deed Wizard tool to start the process as your first step.
After a confidential phone call with one of our qualified debt advisors, we will be able to explain the pros and cons of all available solutions and provide you with a personalised illustration of what your options are, and how much you would be able to reduce your monthly repayments down to.
*When lockdown restrictions allow this to be done so safely. May not be suitable for all. Can affect credit rating. Free advice also available from moneyadviceservice.org.uk