Secured & Unsecured Loans Simply Explained

Over the past two decades obtaining a loan has been a simple process with the general conception and compliance of easy credit through lending institutions. While there are many forms of loans and finance available on the market, personal loans have two popular forms, Secured and Unsecured Loans. Secured Loans A secured loan is a…

Over the past two decades obtaining a loan has been a simple process with the general conception and compliance of easy credit through lending institutions. While there are many forms of loans and finance available on the market, personal loans have two popular forms, Secured and Unsecured Loans.

Secured Loans

A secured loan is a loan given to an individual or business which is secured against an asset. Should the customer who took out the loan / finance default on the loan, the lending / financing institution will get first charge on the asset that the consumer used to lend against.

There are many pros and cons for a secured loan:

  • Pro – Those with poor credit can get a loan providing they have an asset to secure the loan against. By having high levels of equity in the asset that use as security for the loan, the consequent level of borrowing that they can obtain will be higher due to the risk to the lending institution being lowered. Any default payments can be recovered by possession of the secured asset.
  • Con – If the lender defaults on a payment or is unable to fulfill the contractual obligations that run the risk of losing an asset which could have been of far greater value than that of the loan taken out.

Whilst the lender may be taking a large risk by lending to the consumer, this risk is offset by the value of the asset that the loan is secured against.

In recent years rising house prices have contributed to the popularity of secured loans in the form Equity Release [http://www.mortgagerunner.co.uk/mortgages] as consumers have been able to borrow the difference between their owed mortgage value and market value of their home as a loan.

Unsecured Loan

Those who do not wish to use an asset as security or sometimes do not have one to secure a loan against will find that the value they can borrow is less than that of a secured loan. The reason for this is that the lender takes a greater risk of not being able to recover the funds should the consumer deficit on the payment. Due to there being no asset to recover and convert to liquid funds for the lender, the criteria on which the lender assesses the applicable is much more strict as the consumers status must be more attractive to the lender to ensure they can recover the money and that affordability is not an issue.

This is where those looking for an unsecured loan who have no assets should look at their credit rating prior application as the creditors credit score will undrawn be weighed heavily on the loan or finance applied for.

  • Pro – An Unsecured loan will not require any asset to be put up a security should you default on the loan.
  • Con – A stable, integral credit history will be required for application as the lender takes a higher level of risk due to having no asset as security should you default on the loan. Also lower levels of credit will be able to be borrowed due to this increased level of risk

A popular form of loan is and always has been credit cards due to the flexibility and range of options available. In recent years the ability to move balances between 0% interest cards has proved popular to avoid any lock in charges that loans may have by comparison.