The Difference Between Secured and Unsecured Loans
Getting a loan can be a daunting task for some, and when you don’t do your homework ahead of time it can get quite confusing. Before you get a loan, you should understand the difference between the types you can get. Secured loans, compared to unsecured loans, are two completely different things and it’s important to know which one is right for you and your predicament.
Secured loans are “secure” because they are associated with something of value. Secured loans consist of a piece of collateral, such as a home or car, and the lender can use this as a means to get their money if you are unable to successfully repay them for the loan. This means that your home, or piece of collateral that was used in cohesion with the loan, has a risk of being taken away from you.
Although this may sound scary, a secure loan is one of the most common, and they’re a lot easier to obtain than unsecured loans. For those of you who don’t have a perfect credit score, or if you’re trying to rebuild your credit, then a secure loan is most likely what lenders will be more willing to give you, rather than an unsecured loan. Secured loans have their benefits since you’re giving more of a promise that you will pay lenders back, and are willing to offer a piece of collateral in return if something goes wrong. Since you are more confident in this type of loan, then they generally possess better interest rates and higher borrowing limits.
An unsecured loan is a loan that does not consist of a collateral as a backup and you won’t have to worry about a lender coming to repo your property or belongings. Common unsecured loans usually consist of things, like student loans, credit cards or just a personal loan.
When lenders give you an unsecured loan, they are taking on a greater risk, since there’s nothing tied or linked to the loan that could ensure them getting their money back. Lenders tend to take more into consideration when you are asking for an unsecured loan and will check items, such as your credit history, capital, and even collateral. You should expect interest rates to be much higher than secure loans since there is no default for lenders to fall back on.
At FastBucks, we make it easy to help you get the loan you need without any hassle. Our professionals will walk you through the process step-by-step, and answer any questions you may have along the way. We strive to make the loan process as simple as possible, and do all the hard work for you. Contact a professional today for more information and assistance with your next loan.
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What is difference between secured and unsecured loans?
A secured loan is one which you borrow money against something of value you own, a good example being a mortgage where the money is lent to you against your house. It offers saftey to the lender because if you for some reason can't pay, he can get back by selling the house (known as repossession). You however will benifit with lower interest payments for the reduced risk.
Unsecured loans do not require an asset, but is against a legal contract between lender & borrower. This is a more expensive way to borrow due to the higher risk to the lender upon seeing his money back!
A "secured9quot; loan means, when you take a loan, you give something of higher value as "collateral9quot; or guarantee to the lender which he can sell or auction away if you default in your repaying the loan. On the other hand "unsecured9quot; means, you get a loan without any guarantee of repaying it to the lender in which case, should you default, he cannot do anything to recover it, and repayment depends on your decency. He can of course take you to court if there is proof that he had lent you something and you had agreed to repay it within certain periods.
On a secured loan, a borrower promises an asset like a car, a home, a boat or jewelry as collateral for the loan. In an unsecured loan, interest is paid to a lender and no collateral item is required to secure the loan.
Secured and unsecured loans are very different beasts, and knowing the difference between the two is vital before you make any application.
A secured loan, sometimes referred to as a homeowner loan, is one where the debt is linked to the borrower’s property. They are therefore only available to people who own or are buying their own homes, and can be used to borrow anything from £5,000 upwards.
However, the amount you can borrow, the duration of the loan and the interest rate you are offered will all depend on your personal circumstances and the amount of ‘free9rsquo; equity you have in your property.
‘Free9rsquo; equity is the difference between the value of your home and the amount you owe on your mortgage, if you have one.
Unsecured personal loans are available to would-be borrowers who have at least a fair credit score – you do not have to be a homeowner to apply. They can be used to borrow anything from say £1,000 to £25,000. However, they are generally at their cheapest for borrowing of between £7,500 and £15,000.
To avoid paying over the odds, it is also sensible to check the terms and conditions for fees and charges, such as early repayment penalties.
To avoid paying over the odds, it is also sensible to check the terms and conditions for fees and charges such as early repayment penalties.
· Secured loans are available for much larger amounts than personal loans, which generally only go up to about £25,000.
· If you have a less-than-perfect credit history, you may find that you have no choice but to opt for a secured rather than a personal loan. As your property acts as security, they can be easier to qualify for.
· The repayment periods on secured loans can also be longer, while the fixed monthly payments should make it easy to manage your repayment plan.
· You need to keep up repayments on a secured loan or you could risk losing your home.
· Check the terms and conditions for fees and charges such as early repayment penalties as they could increase the cost of borrowing.
· Unsecured personal loans are widely available to a large proportion of people.
· They offer the flexibility to choose how long you have to repay them, with most borrowers making fixed repayments for between one and five years.
· Some loans offer the option of a payment holiday of say two or three months at the start of the agreement.
· The best loan rates are generally for borrowers looking to make repayments over three and five years, meaning you will often pay a higher interest rate to borrow over a shorter term.
· The interest charges on larger or smaller amounts can prove expensive.
· Top deals are only open to those with high credit scores.
If you are only looking to borrow a small amount, say a few thousand pounds, a 0% money transfer credit card could be a better option as you can borrow interest-free for up to 36 months, or even longer. You will, however, have to pay a few, levied as a percentage of the amount you borrow.
For large sums, meanwhile, it may be worth considering remortgaging to free up some cash. Mortgage rates are generally lower than secured loan rates.
The downsides to this include potentially high fees and the fact you could end up paying the interest on the whole amount owed for a multi-year mortgage term.
The interest rates and terms on both secured and unsecured loans vary widely, so it is vital to shop around for the best deal.
You can do this quickly and easily by using the MoneySuperMarket secured loans and unsecured loans channels to compare hundreds of different loans from a wide range of lenders.
Moneysupermarket is a credit broker – this means we’ll show you products offered by lenders. We never take a fee from customers for this broking service. Instead we are usually paid a fee by the lenders – though the size of that payment doesn’t affect how we show products to customers.
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What are Secured and Unsecured Loans, Which is Better?
You need funds to start a new venture? or Require money for education of your children? or Maybe you’re looking out for a new credit card or loan to buy a new car/house? Whatever the requirement, you will need to choose between Secured or Unsecured debt. Each type has its own positives and negatives. So it’s better to be aware about them by going through our cover story.
Secured loans are those loans which are backed by some or the other kind of property or assets. The word secured depicts that these type of loan are protected by some collateral. In case if a borrower fails to pay the loan the creditor can legally auction or sell the collateral to recover the original amount disbursed. Assets such as home, automobile, stocks, gold etc. can be used as collateral. The title of the pledged article will be held by the loan provider (creditor) until it is repaid in full along with the interest. A secured loan is generally less costly for the debtors and more peace-of-mind oriented for the creditors.
- Secured loans are available for larger amounts as compared to personal loans.
- Less paper work and easy to qualify if one has suitable collateral against the loan.
- The time period of loan repayment is also higher as compared to other type of loans.
- Such loans offer lower interest rates as they are secured against your property.
- Failure to repay the loan would result in losing your property.
- Few secured loans have varying interest rates that could make your repayment amount higher.
- Secured loans bear risk factor because they need expensive collateral security.
- You may incur high penalty fees on the repayment of loan.
Unsecured loans are totally opposite to secured loans, they are disbursed without a collateral in place. Such loans are accessible to anyone & you need not have a suitable asset to be pledged as a collateral. Taking unsecured loan implies that the borrower can repay through his financial resources itself. Unsecured loans are usually more costlier than secured loans due to no security in place and more prone to end up as a total loss to the creditor. If you fail to pay an unsecured loan, the lender can drag you to court and damage your credit worthiness as well.
A borrower is judged by 5 C’s before a secured loan is provided:
Examples of Unsecured Loans
- Such loans are quite cheap as compared to Secured ones.
- They give number of options to choose the repayment mode.
- You will not lose any of your assets.
- All you need is a document and signature and you can avail this loan
- As no property is mortgaged, the lenders charge higher interest rates even for a short-term.
- You can get only a limited sum of money from lenders as they give more money on secured loans because there the financial risk is secured.
- Since the loan amounts are not large, the repayment periods are also short as compared to repayment period of secured loans.
- One may get trapped into the debt cycle due to continuous non-payment of loan amounts
The truth, there is NO right answer to this question. What, When, Which & How to opt for which type of loan, totally depends on your need of taking the loan. Both are a good option if they fit in to your requirements perfectly. Generally secured loans are good from creditor’s point of view as there is a collateral to cover up the losses, whereas an unsecured loan is good from a applicant’s point of view as he/she would have no tangible asset to lose in case of a default.
The key is to think in the right direction before applying for the loan. Auto, education, personal, consumer etc. all these type of loans are designed specifically for the purpose stated in their respective name(s). Be willing to pay more & quicker in case if you don’t wish to collateralize your loan. So the preference solely depends on your requirement.
Once you are clear about the type of loan you require, you must approach different lenders to see what interest rates they offer. Don’t forget to compare the rate of interests being offered by different banks and NBFCs before you finalize your lender. Try to browse through some websites to check their respective USPs & repayment plans. Cross check and apply for a loan with the lender which suits best, according to your requirements.