If you need access to some extra cash, perhaps for a new car, a holiday or to consolidate existing debts, chances are you’ve considered taking out a loan. But which type would be right for you? Here’s a quick overview of the options available so you can make an informed decision.
A secured loan is offered when the borrower can provide some form of security or collateral against the amount they’re borrowing. They might secure the loan against a home or a car, for example, giving the lender a guarantee that should the loan not be repaid they can recover the loss through the repossession of the secured item. That means secured loans can generally allow for lower interest rates and higher borrowing limits, and as long as you’ve got suitable collateral they’re usually easier to come by too.
An unsecured loan doesn’t require any form of security, meaning you won’t risk losing your car or home should you fail to make repayments, with loans instead of being decided on the basis of your credit history and income. But, the lack of guarantee means these loans will typically command a higher interest rate than their secured counterparts.
This is a very specific type of unsecured loan, and payday loans are quickly occupying a core section of the market. These are typically short-term, low-capital and high-interest loans that are intended to be repaid over the course of a month (until “payday”), and providers usually offer a flat fee for the service.
As you might expect, payday loans are hugely controversial. The often extortionate interest rates (some APRs are more than 4,000%) and the fact they can be rolled over from month to month has attracted criticism from the Office of Fair Trading, consumer groups and the loan industry as a whole, with these companies offering loans to people who simply can’t afford to repay them.
What about regulations?
The credit industry is subject to strict regulations. The Consumer Credit Act 1974 sets out guidelines that all lenders need to adhere to, and in order to trade legally, they need to be fully licenced by the OFT. But, the rise of payday loans has put these regulations under the spotlight with a lot of companies not sticking to the rules. This particular sector has been found to be poorly regulated and there’s clear evidence of irresponsible lending and breaches of the law across the board, and that’s meant a lot of firms have been given strict ultimatums to reform or lose their licence.
But, that shouldn’t put you off pursuing a loan elsewhere. Secured loans are still a highly viable option and even certain unsecured loans, if sourced carefully, can be ideal, and as long as common sense prevails you can take out a loan for the cash injection you need.