- 1 What is the difference between a secured loan and an unsecured loan?
- 2 What is the difference between secured and unsecured loan in UK’s financial market?
- 3 Difference Between Secured Loan and Unsecured Loan
- 4 What is the Difference Between an Unsecured Personal Loan and a Secured Personal Loan?
- 5 What’s The Difference Between Unsecured And Secured Debt Consolidation?
- 5.1 What’s the difference between secured debt consolidation and unsecured debt consolidation?
- 5.2 How do lenders decide whether to offer secured or unsecured debt consolidation loans?
- 5.3 What should you pay off first: secured or unsecured debt?
- 5.4 Are there other debt consolidation options aside from secured and unsecured loans?
What is the difference between a secured loan and an unsecured loan?
What is the difference between a secured loan and an unsecured loan? | W. Scott Van Ness | W. Scott Van Ness P.A. | A Biblical Approach to The Practice of Law | Contact Scott Van Ness Today | (941) 922-7900 | http://vannesslawfirm.com/ | 2100 Constitution Blvd., Suite 118, Sarasota, FL 34231
A secure loan quite simply means that you're putting something up as collateral whether it be your house, your car, your stock account, your bank account, gold, jewelry, whatever it is. What you're saying is, "If I don't pay this loan then you as a lender have a right to go get whatever I just secured it against." An unsecured loan is just that. It's not guaranteeing that it's going to get paid and you do not have an automatic right to go after my house, my car, my stocks, and so forth.
What is the difference between secured and unsecured loan in UK’s financial market?
Which loan is right for you?
If you are looking forward to raise funds through a loan, then you might be forgiven for being confused about which route to go down and to get the right one (loan) in order to meet your requirements. Well, you need not worry anymore as in this post you will get the difference between secured and unsecured loans in UK’s financial market.
Before explaining the difference between unsecured and secured loans it is important to note that they are actually the different beasts and one should always know the difference between them before making any application.
One of the simple ways to differentiate between loans for any finance products is to check that whether lending is secured or not.
What is an unsecured loan?
Not only in the UK but also in other regions of the world, unsecured loans are available to everyone if the person is having a fair credit score. In order to apply for the same a person doesn’t have to be a homeowner.
Unsecured loans are mostly offered by the lenders, banks, peer-to-peer companies and in most of the cases, they are not backed by any asset. Unsecured loans always suggest that there is a higher risk for the lender as they are having no guarantee of getting their capital back, so the applicants have to pay more interest.
It is also evident that this kind of loans usually tends to be for small amounts and they also take place over a short span of time. Unsecured loans, also known as unsecured business loans are generally backed by industry’s trading position.
It is very common for the lenders to specify the amount of the loan as multiple of their earnings. In this way, they can also make a rough estimate on the future prospect of their business.
Let’s quote an example-
Suppose a person in the UK borrows £5,000 over 5 years given at a rate of 14% with fixed APRC. Then the person has to pay £116.26 every month in 60 installments and the total money payable is around £6975.6. The figure includes net loan, interest of £1975.60, lender and broker fee, etc.
What is a secured loan?
A secured loan, also known as homeowner loan, is actually a credit contract which is backed using the equity in a property which is held by the debtor. This kind of loans is only available to them who are having their own property or homes in the UK and they can borrow between £5,000 to £125,000.
But there care certain that have to be kept in mind, like, the amount borrowed, along with its rate of interest and term depends on the settings and the amount of equity the person is having on his property.
Secured business loans also allow the person to borrow at low interest rate against the property raised and it hardly matters even if the debtor is having bad credit history.
Pros and cons of unsecured loans
- Convenient way to avail the cash you need
- Comes with flexible repaying terms
- Borrowers have to pay high rate of interest
Pros and cons of secured loans
- Offers fixed monthly payment mode
- One can get loan of higher amount
- Repayment failure may result in loss of your home or property
- Might also have to pay penalties in case of failure in the repayment of loan
Difference Between Secured Loan and Unsecured Loan
The differences between secured loans and an unsecured loans are simple to understand. A secured loan involves collateral, while an unsecured loan is based on a signature, or your word to repay it. There are positive and negative aspects to both, and a person can have multiple secured and unsecured loans at the same time.
A secured loan is based on collateral. Collateral is tangible property that the lender places a lien on when providing the loan to a borrower. An example would be a home or car loan. The home does belong to the owner, but the lending institution has a right to take and sell the home if the owner does not make his payments according to the terms of his loan.
There are many types of secured loans. A loan from pawnshop is an example. The owner of the pawn broker will give the owner of a diamond ring cash while keeping the ring as collateral. The owner of the ring will have a limited amount of time to pay any interest and the principle to the shop to get his ring back. Otherwise, the pawnshop has the right to sell the ring to another customer.
An unsecured loan does not have collateral attached. A balance on a credit card is an example. Due to the higher risk the lender assumes with an unsecured loan, the interest rate is usually higher than on a secured loan.
Lenders do have recourse in the event of non-payment of an unsecured loan. The borrower risks suffering damage to his credit rating, and the lender can take the borrower to court for nonpayment. Courts usually award judgments in favor of lenders.
Unsecured loans many times have shorter durations than secured loans. For example, personal unsecured loans through a lending institute, such as a bank, could be for a period of one month to a maximum of five years.
On the other hand, secured loans such as home mortgages can be for 30 years or more, while a new car loan can be for as long as seven years. The longer the duration, the less the borrower may pay per month, but the more interest the borrower will pay to the lender.
Secured loans, particularly home mortgages, have income-tax benefits. These benefits include the ability to deduct interest paid. Businesses may also be able to deduct interest paid on automobile and other types of loans as well.
Whether you have a secured loan or an unsecured loan, the principal is not taxable or tax deductible. Interest is considered income for the party being paid the interest, whether it is a secured loan or an unsecured loan. It should be reported as income on personal or business income taxes.
When you sell something, such as your home, you report the purchase price and the selling price. You may not deduct any interest you paid on the home loan because that interest was reported in earlier years.
What is the Difference Between an Unsecured Personal Loan and a Secured Personal Loan?
This is a common question that many consumers have. Many people do not realize that there are even different types of personal loans. Each type of personal loan, secured and unsecured, have different requirements.
We will look at the requirements for a secured personal loan first. The name "secured loan" pretty much sums it up, to obtain a secured loan the borrower is required to provide some kind of collateral to secure the loan.
The most common forms of collateral used to secure loans are personal property such as your home, land or automobile. When your home is used as collateral, you will often hear the loan referred to as a home equity loan or a second mortgage loan. Personal loans can also be secured with stocks, bonds, certificates of deposit, a savings account, etc. Lenders tend to be more flexible when granting secured loans. Usually the borrower is given a lower interest rate and longer terms to repay the loan compared to an unsecured loan. The downside to a secured personal loan is if you default on the loan and fail to repay it, the collateral used to secure the loan can be seized by the lender.
If you do not have any collateral to put up for security, then you would not be able to qualify for a secured loan. On the other hand, and unsecured loan does not require any collateral. That is why unsecured loans are a great option for non-homeowners.
The requirements for an unsecured personal loan rely on the borrower's credit history. Since there is no collateral securing the loan, the lender has to base creditworthiness of the borrower on his or her past credit activities.
The higher a credit score the borrower has the more likely for approval they will be. A good credit score can also guarantee a higher loan amount and a lower interest rate. If you have poor credit, you could still qualify for an unsecured loan but expect to pay a much higher interest rate.
There are some really great deals and interest rates on unsecured loans these days. But all in all, usually the limit on an unsecured loan will be lower than the limit for a secured loan and the interest rates are usually higher. Visit Easy Approval Personal Loans to apply online for a unsecured personal loan today or to learn more.
Note: This article may be freely reproduced as long as the authors bio paragraph at the bottom of this article is included, the article is published "as is" (unedited) and all URL's are made active hyperlinks with no syntax changes.
This article was written by Beth Pardue who has over 10 years of experience in the financial industry assisting clients with assorted financial needs. To learn more about your personal loan options or to apply for a personal loan online please visit: http://www.easy-approval-personal-loans.com
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What’s The Difference Between Unsecured And Secured Debt Consolidation?
People learn many different things in school when they’re growing up. Some of those things end up being super useful. After all, you wouldn’t get too far in life if you couldn’t read, after all. We memorize some things, forget them, and never need them again. Most of us don’t find ourselves grappling with quadratic equations on a daily basis.
Despite all of this education, though, there are some things barely taught in schools despite the fact that they’re extremely necessary for living a normal life. Financial literacy is one of those things.
Because of this lack of financial education, people end up turning to Google to answer their questions about finance, debt, and other topics. Here’s one question that we see searched all the time:
What’s the difference between unsecured and secured debt consolidation?
It’s an important question. Despite the fact that secured and unsecured debt consolidation sound like they’d be similar things, there are huge differences that you should be aware of if you’re researching your debt consolidation options. Choosing debt consolidation can be a life-changing decision, and you should make sure you have all necessary information before you sign any paperwork.
So, what is the difference between secured and unsecured debt consolidation? First, let’s define what each of these terms actually means.
When you’re talking about secured debt consolidation, you’re likely talking about a personal loan that you take out from a bank or other lending institution. You use that loan to pay off all your various different debts at once, and then focus on paying down the loan. Ideally, you’ll end up paying less overall on your debt while getting out of debt faster than you would otherwise.
With a secured debt consolidation loan, you give the lender “security” for the lent sum by putting up a major asset as collateral. If for some reason you’re unable to keep up with the payments on your loan, then the lender can legally seize that collateral and recoup some of its losses.
What the lender accepts as collateral can vary widely. Collateral does not have to be valued at the value of the loan; it can be worth less or more, and lenders tend to be conservative with their valuations. Most of the time, with secured debt consolidation, lenders ask for major assets such as your home or your car as collateral. If you can’t keep up with your payments, you don’t just end up in financial hot water, you might end up losing your house or your vehicle as well.
Other forms of collateral might be acceptable too, including everything from jewelry to land and other types of sellable assets. The easier that collateral would be to repossess and sell at a fair price, the more attractive that collateral will be to a lender.
Why do lenders ask for collateral for secured debt consolidation? Collateral helps lenders minimize the risk they’re taking on by lending to you. Above all, lenders want to be “made whole” when they lend, making their money back (and then some), no matter what. Being able to repossess and sell your collateral ensures that the lender will at least get something out of the deal.
That said; lenders don’t really want to seize your collateral if they don’t have to. Seizing collateral is a royal headache for everyone involved, and lenders aren’t set up well to repossess and resell assets. They’d much rather collect your money.
With unsecured debt consolidation, you have the same basic situation as secured debt consolidation. You’re working with a lender to get a personal loan that will allow you to pay off all of your various creditors at once. You then focus on paying off the loan.
With unsecured debt consolidation, though, you are not required to put up any sort of collateral in order to get the loan. You receive offers for these “signature loans” when the lender is relatively certain that you’ll be able to keep up with your payments. You just sign the paperwork and that’s that.
What’s the difference between secured debt consolidation and unsecured debt consolidation?
On paper, it seems like the difference between secured debt consolidation and unsecured debt consolidation is obvious: collateral. However, there are other, deeper differences between the two different types of debt consolidation loans.
One major difference is in interest rates. Unsecured debt consolidation loans tend to have higher interest rates than secured debt consolidation loans do. These higher interest rates stem from the fact that the lender is taking on more risk when offering you an unsecured loan. The higher interest rates are their way of hedging their bets and making they’re getting good value from the loan.
Another major difference is that unsecured debt consolidation loans can be much more difficult to get than secured debt consolidation loans. That makes sense when you think about it. After all, with an unsecured loan, the lender makes the decision to trust you to make your payments on time. That’s not a decision typically taken lightly.
So, how do lenders evaluate whether to offer you a secured or unsecured debt consolidation loan? Let’s dig into some common ways lenders judge potential borrowers.
How do lenders decide whether to offer secured or unsecured debt consolidation loans?
Lenders evaluate potential borrowers on a number of different criteria. The main factor for most lenders is the borrower’s creditworthiness, often summed up with a few categories known as the “Five C’s.” While lenders don’t actually have a creditworthiness grading rubric based on the Five C’s, you can be certain that they’ll have all five categories in mind when determining your creditworthiness. The Five C’s are as follows:
Character, as it relates to creditworthiness, means the quality of your character as a borrower. Can you be trusted to reliably manage your money and keep up with your payments? Does your credit score indicate a history of responsible borrowing? Or, has it taken a hit due to an inability to keep up with a lender in the past? In general, do you have a history of accountability and frugality? All of these questions are important to a lender trying to get a sense of your character.
To a lender, capacity means your capacity to keep up with your loan payments. Most commonly, lenders judge capacity by looking at your debt-to-income ratio. How much debt do you currently have, and how much of your income each month goes towards paying it off? A higher debt-to-income ratio is common for people who are seeking debt consolidations loans, but it can also be a red flag to a wary lender trying to evaluate the risks of lending.
Capital here does not just mean how much money you have in your bank account. It includes savings, investments, and major assets. Lenders like to see higher amounts of capital for a variety of reasons, but the main one is that if you have a large amount of capital, you’ll be able to keep up with your loan payments even if you suddenly lose your job or source of income.
The assets that you could conceivably put up as collateral are important to lenders for most types of loans. When the lender is trying to figure out whether to offer a secured or unsecured loan (or whether it should offer you a loan at all), it might ask what assets you could put up as collateral if you had to. Chances are, though, that you won’t have that discussion until after the lender has decided to offer you a secured loan anyway.
What conditions led you to seek a debt consolidation loan? Was it irresponsible spending on credit cards? Did you need to finance an emergency medical procedure for yourself or a family member? What will you do differently to ensure that you don’t fall into debt again if approved for the loan? Understanding your circumstances through questions like these is vital for a lender to get a handle on your creditworthiness as a whole.
The Five C’s are just a rule of thumb, but they can be helpful to consider. These criteria help lenders not only decide whether to offer you a secured or unsecured loan, but also help lenders set your interest rates or decide whether to lend to you at all.
What should you pay off first: secured or unsecured debt?
Sometimes, individuals who are in a lot of debt and spending a large portion of their income on keeping up with their debt payments have to make difficult decisions about which payments to focus on first. While the right decision is usually dependent on their individual context and situation, people often want to know whether they should focus on paying down their secured debt or unsecured debt first.
This decision is almost entirely dependent on just how dire your financial situation is. If you’re struggling to keep up with all of your loan payments on time and need choose which payments you should make on time, then it’s likely smarter to pay down your secured debt first. After all, secured debt is tied to major collateral, such as your home or car. You can’t afford to lose those things, especially not if you’re already struggling financially. Falling behind on unsecured debt can be disastrous for your credit score, but at least it’s not going to ruin your life immediately.
If you’re not struggling financially, then the opposite might be true. Perhaps you’re trying to decide which debt you should prioritize paying extra on so that you can get out of debt quicker than you would just by making minimum payments. In this case, it might make more sense to target one of your unsecured debts first. Unsecured debts, after all, tend to have much higher interest rates than secured debts do. By eliminating unsecured debts first, you might stand to save a lot of money in the end in interest payments.
All of that said; there’s no single right answer for whether you should pay off your secured or unsecured debts first. The best advice we can give would be to take stock of your overall financial situation and make the best decision you can in the short term. Then, start budgeting and strategizing so that you never have to make that kind of difficult, no-win financial decision again.
Are there other debt consolidation options aside from secured and unsecured loans?
Personal loans are definitely the most common form of debt consolidation, but they’re far from the only ways you can consolidate your debt and take control of your financial future. Other types of debt consolidation, such as balance transfer credit cards, debt settlement savings accounts, and credit counseling can be wise alternatives to personal loans.
If you’d like to explore all your debt consolidation options and figure out what the right course of action is for you, look at the services National Debt Relief offers or just give us a call. We’d be happy to walk through your options with you and help you to find a solution to your debt problems. We’ve helped many people in need of advice on how to deal with their debt figure out their finances and get their lives back. Just check out our reviews and see for yourself!