Looking into Secured and Unsecured Loans

Loans usually fall into two basic categories – Secured and Unsecured. This article discusses each type, their advantages and examples.

Secured loan

A secured loan is a type of loan that is protected by collateral or an asset. A house or a car can be used as collateral, and the lending company can hold the title or the deed of the property until the loan is settled fully with interest and other applicable fees. Bonds, stocks, and even personal property can also be used to secure a loan. The amount of money than can be loaned ranges from £5,000 to £125,000, depending on the borrower’s personal circumstances as well as the value of the property.

A secured loan is usually the best and sometimes only way to obtain a large amount of money. Because of the assurance that the collateral brings, it allows the lender to loan more, knowing that he can be repaid at some sort. The fact that you are putting your property on the line is enough guarantee for lenders that you will do your part to ensure that the loan is settled as agreed.

There are also some who use home equity loans as collateral. When a borrower is currently paying for a house but holds the deed, he can use the property to guarantee a loan. The value of the house is then derived by the market value of the house less the amount that is yet to be paid. However, this also puts you at risk of losing your home if you are unable to pay timely.

Because secured loans typically release higher amounts of cash, lenders usually provide lower interest rates and higher limits for borrowing. Furthermore, there are longer terms of repayment as compared to unsecured loans. As the term itself implies, secured loans mean that you provide security to the lender that you will repay the loan as per the agreement between you and the lender. However, always keep in mind that the inability to repay this type of loan may lead to the lender to recourse the collateral and sell it to pay off the loan you borrowed.

Samples of secured loan include home equity line of credit, mortgage, recreational vehicle loan, auto loan (both new and used), as well as a boat loan.

Unsecured loan

An unsecured loan, on the other hand is the opposite of a secured loan in the sense that there are no properties or collateral involved. In this type of loan, lenders take a higher risk in lending money to a borrower who offers no security about his ability to pay the debt. As a result, the interest rates are higher, and borrowing is difficult for those who have poor credit standing. One can be turned down in getting an unsecured loan, however, this is not the case for secured loans – so long as there is a property or collateral that can be used as a guarantee, then the borrower can still obtain the money. For personal loans, the borrower can get a loan of £1,000 to £25,000.

When it comes it unsecured loans, the lender looks into your repayment capabilities based on your financial resources. Lenders look into the five C’s of credit – capacity, character, collateral, capital and conditions, which are the criteria said to assess the creditworthiness of a borrower. The first four look into the willingness of the borrower and his ability to settle the debt, while the last one consider the borrower’s situation as well as surrounding economic factors.

Compared to secured loans, the unsecured type allows more flexibility in repayment terms. Most borrowers arrange for fixed payments that range between 1 to 5 years. However, unsecured loans have lower interest rates if the borrower chooses to pay in 3-5 years, so those who choose to pay in shorter terms may deal with higher interest rates and fees.

Some of the common examples of unsecured loans are credit cards, personal lines of credit, personal or signature loans, home improvement loans, as well as student loans.