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In an ideal world we’d all have enough money so that we would never have to borrow money from anyone.

If you’re the sort of person who likes to eat, sleep and live, however – you’ll have noticed that this isn’t an ideal world, and life inevitably costs more than we earn.

So, (and you can probably see where I’m going with this) it occasionally becomes necessary to take out some sort of loan. In the interest of keeping costs down, it stands to reason that you would look for the cheapest loan.

Pump the brakes though, here’s why the cheapest loans aren’t necessarily the best or most appropriate loans for you.

Let’s talk about security

You need to think about whether your loan should be secured or unsecured. If you’re
unfamiliar with this terminology, here’s the basic difference:

Secured loans are when you borrow money against a property which is already mortgaged. Sometimes they are known as second charge loans. If there is no mortgage on the property because you’re lucky enough to own it outright, the loan is known as a first charge loan.

Traditionally, these secured loans have been more expensive and seen as the last resort of those who, for whatever reason, could not borrow without security.

Since the recession, however, cheap unsecured loans have become harder to come by
because lenders have had to be more selective about who they lend to. As a result, secured loans may now be a more viable option, particularly for people who want to borrow large sums over longer periods.

By contrast, those wanting to borrow a relatively small amount of money over a short period of time might be better off with an unsecured loan, regardless of its rate.

Of course each have their benefits and drawbacks, and you should consider both before
signing on the dotted line.

Risky business

With secured loans, it’s all about risk. If you secure a loan against a property and you fall
behind with your repayments, you could ultimately lose the property.

You might think, by contrast, that an unsecured loan would carry less risk – and compared to losing your home it does. But falling behind with payments on an unsecured loan can damage your credit rating, which will make it harder to get credit in the future, if and when you need it.

Go for what’s suitable, not cheap

The laboured point I’m making is that you shouldn’t necessarily choose a loan based on the rate of interest it carries. A more important thing to consider is which loan product is more suitable for what you need, depending on the amount you want to borrow, the repayment period and whether you need to secure it or not.

This has been a guest post from Money Supermarket.