Unsecured and Secured Loans – the Differences

Thursday, December 4, 2008

Unsecured and Secured Loans – the Differences

Author: Jenny Austin
Do you know the differences between unsecured and secured loans? If you are looking around for a loan you will be faced with these terms frequently. Do you know which type of loan will suit you in your current situation?

It can be difficult for the average consumer to make their way through the process of obtaining a loan when faced with all of this terminology, often we simply let whomever is the professional involved guide us. Really we should make it our business to understand the differences between these types of loan and ensure we choose one which suits our requirements; after all we will be paying for it. These two main types of loan can be broken down into simple to understand points.

An Unsecured loan is one which does not require any security what so ever, not even your home. It is not difficult to obtain an Unsecured Loan but the Lender will require that you have a low debt to income ratio and a good credit rating. With a Unsecured Loan the Lender will believe that you will be able to repay the Loan amount as agreed, you will have to prove financial stability. You can expect the interest you pay to be higher than you would be charged on a Secured Loan, this is because this type of Loan is classed as a higher risk by the Lender. Unsecured Loans can take many forms such as Student Loans, Personal Loans and even some Home Improvement Loans.

A Secured Loan involves the Lender requiring you to secure the Loan with something, such as the consumer’s car or home. This means that you are providing collateral to the Lender, which in turn means should you not pay the Lender, has rights to whatever object you have used as security. For many consumers a Secured Loan is the preferred rate as they normally offer a lower rate of interest compared to Unsecured Loans, also many consumers do not have the credit or funds to get an Unsecured Loan.

Which Loan is suitable for you is very much dependent on your circumstances and what you require the Loan for. If you only need to borrow a small amount of money, perhaps you want to completely revamp your garden then an Unsecured Loan is probably the most suitable. Secured Loans have many forms such as mortgages, homeowner secured loans, equity release loans and bridging finance. Other Secured Loans include car and boat loans as well as home improvement loans.

Using a Secured Loan is the best option to buy your home this does not mean you need to put up collateral to purchase your home as your home is the collateral. Should you not make your payments then you could lose your home. The same principal applies if you are purchasing a new or used car, the car is the collateral for the lender and should you not make your payments the car will be turned over to the Lender.

Secured and Unsecured Loans have many uses usually life changing purchases such as homes and cars come under Secured Loans and everything else falls under Unsecured Loans. Obviously you can only obtain an Unsecured Loan if you have a good enough credit score it is best to browse and find at least three comparisons for cost so you can be sure that whatever loan you opt for you are getting the best available deal.