Secured vs Unsecured Loans
Posted by admin on December 6th, 2011 filed in Loans
The difference between an unsecured loan and a secured loan ought to be obvious, but the two types of finance are not as dissimilar as some people might assume.
An unsecured loan is typically defined as a type of finance that does not require the borrower to provide security for the debt. In the vast majority of consumer credit agreements, the borrower`s home is counted as security. Thus, a person who applies for an unsecured loan does so without explicitly providing his home as security for the debt.
A secured loan is obviously a type of finance for which the borrower has provided his home as security for the debt. As mentioned above, while these two types of finance seem very different, in practice this is not always the case.
The advantage of choosing a secured loan is usually one of cost. Security does not constitute security for the borrower (quite the opposite, in fact), but instead protects the lender`s investment should the borrower default on repayments. Offering security for a loan is advantageous in so far as the lender is, in most cases at least, able to offer relatively low rates of interest. This is possible because the security provided by the borrower has reduced the risk associated with the debt; after all, if the borrower defaults, the lender can instigate proceedings to repossess (or force the sale of) his home.
One other advantage of a secured loan is that larger sums of finance are usually available to the borrower. Secured loans of between £3,000 and £100,000 are not uncommon even in today`s economy, but just because a loan is secured does not mean that acceptance is guaranteed; loan applicants must still be able to demonstrate (e.g., through credit scoring) that they are capable of repaying the loan as agreed.
Unsecured loans, therefore, are invariably smaller in sum and higher in cost. Lenders do not explicitly demand security for loans in the form of property, so the risk of providing finance is substantially higher. The increased risk results in higher interest rates, which inflate the total sum of the loan to be repaid. It is not uncommon for a person who borrows £5,000 through an unsecured loan to pay hundreds of pounds more in interest compared to a person who borrows the same amount through a secured loan.
The provision of finance for unsecured loans is also much lower. Although unsecured loans for £100,000 or more are sometimes advertised, they are only very rarely granted; the majority of unsecured loans are for relatively small sums of cash, usually under £10,000 in value. The main advantage of an unsecured loan is that the borrower does not risk losing his home should he default on repayments. Or does he?
A little-known provision of the law allows some lenders to apply to the court for a charging order, which has the effect of converting an unsecured debt into one that is, for all intents and purposes, secured. The charging order, which allows lenders to force the same of a home, can be made if a homeowner defaults on repayments for an unsecured loan. Although used only rarely by lenders, the threat of a charging order is sufficient to prompt some applicants to opt for secured loans.
Whatever type of finance is sought, a loans calculator should be used to determine precisely how much money the applicant can borrow by working out how much money he can comfortably repay. Ensuring that repayments are made in full and on time without exception is the only to way to guarantee that a borrower`s home will not be repossessed.