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Overview
of secured loans and unsecured loans
Types of Loans
One of the most important
distinctions between different types of loans is the
security required by the lender. Security refers to the
collateral offered to the bank to lend money against.
If you fail to repay your loan in
the timely fashion, the lender will have the right to seize
your collateral and sell it in order to repay the loan.
High-quality collateral reduces
risk to the lender and often results in a lower rate of
interest on the loan.
Individuals who have declared
bankruptcy or otherwise have poor quality credit often find
it impossible to borrow money without offering high-quality
collateral as security on the loan.
Unsecured Loans
Unsecured loans are loans made to
individuals which do not require any form of collateral
since the credit quality and financial position of the
individual is sufficient for the lender to extend credit
without collateral. Most lenders limit the size of the
unsecured loans to less than £15,000 or £25,000 without
special credit approval.
Secured
Loans
Most secured personal loans use
excess equity in your home or other property, as collateral
but other types of assets might be acceptable. Home equity
is difference between the value of your home and amount of
mortgage outstanding on it. Your home will be at risk if
you fail to make repayments on loan, which uses your home as
collateral.
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Secured Loan |
Unsecured Loan |
| Requires collateral,
usually your home, which will be at risk if you fail
to make repayments |
Requires that the credit
rating and financial position of the applicant is
such that no collateral is required. |
| Can often be used for any
purpose |
The lender might restrict
the loan to explicitly exclude certain purposes
(e.g. to start a business) |
| Loan amount could be
limited by the value of your collateral (e.g. the
value of your home will limit the amount of the loan
you can secure on it). |
Most lenders limit
unsecured loans to less than £15,000 or £25,000 |
| Is often cheaper than an
unsecured loan |
Overview
of secured loans and unsecured loans
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