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Secured Loans vs. Unsecured Loans – Choosing Between The Two Diverse Ends
By: Andrew Baker
Often in our search for finance options, we are led into a crossroad where we
have to make a choice between secured and unsecured loans. Both are equally
alluring and put the borrower in a difficult spot. It is difficult to make up
the mind regarding one particular finance option because each has their share of
advantages and disadvantages. What makes it more difficult to decide upon the
finance option is that both secured and unsecured loans have a conflicting set
of features, and the disadvantages of one are countered by the other.
Secured loans vs. Unsecured loans
Secured loans are the most conventional method of financing large sums of money.
Even in older times people used to take loans to use in agriculture or other
such needs by keeping their lands as security. Unsecured loans, on the other
hand are of a recent origin. Since secured loans required the borrower to keep
his home as collateral, many people who were without homes or who did not prefer
attaching homes to obligations were left without finance. This also hampered the
lending business of the lenders because the group was sizable. Thus, unsecured
loans were launched as an alternative to the secured loans.
Misconceptions on Secured loans
There are many a myths doing rounds that have led to a sagging popularity of
secured loans. People believe that by offering home as collateral they will have
to move home until they repay the amount lent. People only transfer the
ownership rights and not the right to live in the home. The lender can lay claim
to the home only when the borrower does not repay the loan in full.
This will particularly interest the homeowners who do not take secured loans to
protect their homes. Another important point that these people need to keep in
mind is that they cannot escape the lender even on taking an unsecured loan.
Though these loans are offered without any backing, the lender finds ways
through which to recover the amount remaining on the unsecured loans.
This will shift a major part of the clientele for unsecured loans that comprises
of the homeowners. However, unsecured loans continue to be the lifeline for the
tenants. This is in spite of the fact that unsecured loans are more costly than
the secured loans. The rate of interest charged from the unsecured loan
customers is higher because of the larger risk involved.
Credit requirements
One often gets to hear about credit history in the financial circles. Credit
history is a record of the conduct of an individual in terms of the credit
behaviour. Any failure by an individual on any debts, loans, or mortgages is
immediately recorded in the credit file. Though lenders prefer the borrower to
have a good credit history, they do not attach a special importance to it if the
borrower is offering collateral. Home can back the loan if the borrower refuses
to. The backing however is absent in an unsecured loan. This is why lenders
demand a good credit history when offering an unsecured loan. Lenders who accept
to offer unsecured loans with bad credit try to compensate the risk with a still
higher interest rate.
Terms differ with a secured loan
With a secured loan, you can in fact enjoy more favourable terms than the
unsecured loans. Apart from the low interest rate, there are many more features
exclusively for the borrowers of secured loans. Some lenders allow the borrowers
to extend the period of repayment of the secured loans as much as they desire.
Typical repayment period extends between 5-30 years. Extending the term of
repayment however, increases the interest that a borrower will have to pay.
Borrowers can discuss with experts about the optimum term that will lessen the
interest cost without increasing the burden on the monthly income.
Whatever be the option chosen, adequate consideration must be given to the
conditions under which the option is to work. A particular finance option that
did wonders to your friends finances, need not necessarily work in the same
manner in your case. Instead of improving the situation, they sometimes back
fire with serious consequences for the finances. Taking second opinion is always
beneficial since it helps to test the validity of the advice offered by your
lender.
About the Author:
Andrew baker has done his masters in finance from CPIT. He is engaged in
providing free, professional, and independent advice to the residents of the
UK.He works for the Secured loan web site uk finance world for any type of uk
secured and unsecured loan please visit
www.ukfinanceworld.co.uk |
