Secured Versus Unsecured Loans

Before drawing a comparative picture of secured and unsecured loans, let us understand what they mean in order to underline the differences, benefits and related things. A secured loan, as it appears, has a guarantee attached to it. This loan is available to the customer at a lower interest rate due to the fact that bank can recover the loan amount from the guarantee or collateral which the borrower/customer provides. Generally, a home, car, savings account may work as the collateral. This type of loan is a credit building method for the borrower. Examples of secured loan are car loan, home loan, etc.

An unsecured loan is one where a collateral or guarantee is not needed. The loan is provided on the basis of the income and expenses of the borrower. Examples are personal loan, bank overdraft, credit card loan, etc. This type of loan is suitable for those who have immediate money requirement and do not wish to get engaged in too much of paper work.

Depending upon the financial requirement of a borrower, a choice between secured loan and unsecured loan can be made. The unsecured loan, to begin with, is easy to access. They require less of paper work, and are suited for the immediate financial need of a borrower. However, the rate of interest is high considering the fact that no collateral is desired here. They can be obtained easily if the borrower furnishes a credit history to the bank. They are suitable for short term borrowing (as they carry high interest rate). The high interest rate is justified by the lender due to the absence of any collateral on which the lender could have otherwise relied upon.

On the other hand, the secured loan carries lesser rate of interest but a collateral is a must here. Even if the borrower does not provide a good credit history, he/she can get a secured loan with a collateral. In case of non-payment of the loan, the collateral is used by the bank to make for the loan amount. Precision and regular check , therefore, must be taken to consistently maintain payments, as the collateral may be repossessed if payments fall behind. It is mainly suitable for those who maintain discipline and are regular in their paper work. Secured loans have increasingly become popular in the UK financial market . Such loans are generally used when the loan amount exceeds £5,000 pounds and the borrower wishes to maintain the longer length of the loan term (usually 5 to 25 years). They involved large amount of paper work and an appraisal of the collateral.

Before taking a loan, the borrower should try to obtain the all necessary information regarding the pros and cons of the loan type desired in order to get the best interest rate available in the market and avoid unnecessary credit inquiries. The exact rate of interest depends on market and varies with the loan amount. It is always advisable to do extensive research prior to applying for the loan. Experts advice that it will be time well spent and can enable the borrower save thousands of pounds in the long run. Try seeking reliable financial advices from the experts and then plan accordingly. Do not act in haste as it can lead to loss of your hard earned money and assets.

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