Differences Between Secured and Unsecured Loans
When you decide to get out a personal loan you are going to have to make a choice between an unsecured loans or secured loans. Each of these loans types has pros and cons attached to them but the defining difference between the two of these loans is that one has a property attached to it whereas the other does not. Unsecured loan advantages are that they do not have a property attached to them, hence why they are labelled unsecured loans. These loans pose more risk to the banks and building societies who act as lenders for loans due to the potential losses they can face if someone doesn't meet their repayments. If a lender is issuing out a secured loan it means that in the event that a borrower defaults on their payments, the lender can take equity from the property that has been attached to the loan, or if the loan is big enough the lender can repossess the entire property if they deem it necessary.
Cash Limits
Due to the increased risks that an unsecured loan poses when compared to a secured loan the lenders of unsecured loan take various measures to protect themselves. Firstly they do not allow borrowers to take out as much money from an unsecured loan as they would do with a secured loan. With unsecured loans a borrower can take out around £25000 pounds depending on the lender; however it is rare that you find a lender who will offer more than this on an unsecured loan. This is because the more money a lender gives to a borrower the larger the loss would be if that borrower defaults. They will also put a limit on the amount they give on secured loans but it is usually double that an unsecured loan's cash limit.
Interest Rates
Other differences between unsecured and secured loans are in their interest rates. This is again down to the banks and building societies looking for ways to protect themselves. With an unsecured loan a lender will set high interest rates, so they can firstly reduce the amount of losses they would incur in the event that a borrower defaults and secondly so they can filter out prospective borrowers who are not financially stable.
If you do not have sufficient income to be able to pay for the repayments on your unsecured loan a lender is not going to want to grant you any money. So by making their unsecured loans more expensive they are going to stop those financial unstable individuals who might not be able to make their repayments. Secured loans on the other hand have lower interest rates attached to them because they are a lot less risky for the lenders to issue out.
As a borrower one of the key things that you should be aware of when applying for either a secured or unsecured loan is your credit rating. Your credit rating is going to have a big affect on the conditions of your loan and is likely to decide whether or not you can get an unsecured loan or not. This is because unsecured loans demand borrowers who have a good credit rating so a lender can be sure that they are going to meet their repayments. If you have a bad credit rating it is an indication that you have missed past debts and bills and thus that you are potentially likely to do it again. Keep these differences between secured and unsecured loans in mind when you are applying and you should be able to find a good deal.