15 Sep 2014
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Do you know the difference between secured and unsecured loans?

Do you know the difference between secured and unsecured loans?

Do you know the difference between a Secured and Unsecured Loan?

When you’re looking to raise some cash, whether it’s for a new car, a much needed vacation, or some home improvements, getting the loan you need can be easier than you think.

Once you have decided you need  a loan the first thing you need to decide is whether or not you want to secure it against your home, or other property that you may own. Banks and lenders are much more likely to lend you the money if you have a property against which to secure the loan, but it is important to remember that your home will be at risk if you miss payments on a secured loan, or fail to make the payments at all.

If you are certain you can afford the payments, and you have carefully worked out your finances, it is useful for you understand the main advantages and disadvantages to a secured loan, as opposed to an unsecured loan.

Secured Loan

A secured loan is a loan that is secured by assets you own, something you put up as security in the event that the required payments for the loan are not fully met. A secured loan is essentially a safety net for the loan issuer; they will hold the home, car, or any other item of great value until the loan has been paid back in full along with all other fees. Aside from physical property like cars or home, a stock or a bond may also be issued as assets in case the loan is not paid back in a sufficient enough amount of time. Secured loans are usually what you will be looking for to get a boat loan, car loan, mortgage or home improvements.

While the consequences of not fulfilling a secured loan are much more critical than only losing a monetary sum, they are generally the only way for a person with ordinary credit to receive significantly large amounts of money on the spot; this is, understandably, due to the fact that most lenders will not provide loans that they don’t believe are likely to ever get realistically paid back.

The advantages of a secured loan is that lenders will often be far more prepared to lend to customers with assets or property, even if they have a poor credit history, or if they have defaulted on loans or credit card repayments in the past. Certainly, a lender will be able to offer a far more competitive rate of interest to those who have assets which loans can be secured against making it easier for customers to take out loans for a variety of purposes. If your home is your main asset, then any loans secured against it will become second charges on the property, as the mortgage will take place as the first charge. If there is no mortgage on the property then the loan secured on it will take place as first charge.

Unsecured Loan

An unsecured loan, unlike a secured loan, does not require that the applicant offer up any personal property to complete requirements for the release of funds. The trade-off is that due to there being no true guarantee of compensation, the amounts that you’ll get for an unsecured loan are generally much lower than what is offered in a secured loan. In addition to being less likely to get big money for an unsecured loan, you’ll also generally have a much higher interest rate than what’s encountered in a secured loan. When you’ve applied for an unsecured loan, this generally implies that the lender trusts your character and your resources. Unsecured loans are what you will generally be looking for to acquire personal lines of credit, student loans, credit card applications and personal loans.

With an unsecured loan, if you fail to repay the loan, the lender cannot repossess your home. As long as you meet the payments, your debt will be paid off within a set time, and your credit score will remain in good shape allowing you to take further credit, if required, in the future.

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