What Is the Difference between Unsecured and Secured Loans?
When you are planning on getting a loan, it’s good to know the difference between secured and unsecured loans. There are factors that determine whether you qualify for a secured or an unsecured loan. As you understand the differences between the two, you will still get to dive deeper into the factors that determine whether you should apply for a secured or an unsecured loan. Read on to distinguish between the two.
The major factor that defines a secured loan is that it has security. Basically, security is an asset belonging to the borrower that is tied to the loan. It can be a piece of land, property, or a car. Just like the name suggests, the asset acts as a security measure so that in case a borrower fails to repay the loan, it can be used to recover the money. Since the loan is secured, it doesn’t attract high-interest rates.
Another important factor tied up with secured loans is that it is majorly associated with large amounts of money. If you are applying for a large sum of money, more than £10,000, you will have to apply for a secured loan. Since you have one of your assets acting as security, you give your lender the confidence to approve your loan amount. This means that a secured loan is more risky to a borrower and less risky to a lender.
Of great importance still, the issue of credit rating comes to the fore. If a borrower has a poor credit rating, a secured loan is the most likely option. This is a way of protecting a lender from the risk of failure to pay by the borrower. Thus, most lenders insist that borrowers with a poor credit record have to secure their loans to have them approved.
Fundamentally, an unsecured loan is one that doesn’t have security to guarantee its approval. Given that the loan is unsecured, the interest rates are usually higher than those of a secured loan. It’s also worth pointing out that, usually, an unsecured loan has a lesser repayment period than a secured loan. However, the flexibility of both the repayment time and interest rate is up to the lender. Some unsecured loans can be delivered to your doorstep, these are known as doorstep loans.
Moreover, the credit history of a borrower plays a major role in an unsecured loan. Since there’s a higher risk associated with an unsecured loan, lenders opt to give such loans to borrowers who have a good credit record. If you have a good credit record, lenders will have the confidence to give you an unsecured loan.
Again, the question of the loan amount comes in. Compared with a secured loan, the loan amount for unsecured loans is usually smaller. The reason for this is that the risk is higher on the side of the lender than the borrower. Since the loan doesn’t have any security, lenders opt not to give out large sums of money.
Whether you are taking a secured or an unsecured loan, you need to plan well on how you will repay it. Having known the elemental differences between a secured and an unsecured loan, you are now able to know the one that you qualify for. Better still, you can get advice from a financial expert for more information.