It is sometimes overwhelming to decide which type of loan to borrow at the time when you need to finance your needs. Beginners have even greater challenges when it comes to borrowing, especially because they do not have the knowledge or experience of the lending market. Perhaps you have heard your lender or friend talk about secured loans and unsecured loans.
Secured loans are types of loans that require the borrower to provide certain conventional collateral or security to guarantee that the loan will be paid as per the loan contract. On the other hand, unsecured loans are borrowings that do not rely on any form of security but rather is based on the borrower’s borrowing history and ability.
What Does A Secured Loan Mean For Beginners?
Secured loans, especially if the security is a home can be a risky affair, especially because the home can be repossessed if you fail to settle the payment as agreed. However, this does not mean that secured loans are all bad. Here are some facts and guides about secured loans that you might want to know:
A good example of a secured loan is a mortgage loan in which the property financed is used as a security for the loan. Here, the lender retains a claim in the property and can sell the said property to recoup the money back in case of failure on the part of the borrower to pay. While many traditional banks and societies still employ this conventional way of lending, some of them are now embracing the new approach to help people who cannot afford a security.
Despite unsecured loans being easy to borrow because they do not require strict security, many people still prefer secured loans to finance their major projects. Ordinarily, a loan that doesn’t put your property at risk should be preferred over the one that requires it to be pledged as a security. However, secure loans come with numerous benefits, including the following:
Ease with which you can obtain them—unsecured loans are relatively cheap, but they are not easily accessible to people with poor credit ratings. Many financial institutions do not entertain applications from people whose credit scores are below the desired levels. On the other hand, banks will be more willing to lend to people regardless of their poor credit scores since they know that loans will be paid, or they will be able to get their money back.
Ability to Borrow Large Amounts—unsecured loans have lower borrowing limits because of the risk that accompanies them. On the other hand, secured lenders are free to lend more money because there is a guarantee and a low risk of non-payment or loss due to failure by the borrower to pay back.
Debt Burden Spread over a Longer Period—secured loans come with high set up costs and the fact that they also involve large amounts, lenders usually prefer setting up longer repayment periods that can stretch up to 20 years. Although borrowing a loan over a long period means higher cumulative interest repayment, the instalment is often significantly low to allow for easy repayment.
How Institutions Charge Interest on Secured Loans
The most common type of interest regime on secured loans is fixed interest during the life of the loan. However, in UK, the lending market has remained dynamic and banks together with mortgage companies are beginning to adopt variable interest rates.
Whenever you are thinking of a long-term form of finance with a variable interest rate, it is important to consider the future changes in the market and whether it will significantly affect your ability to repay your loan in the even that interest rates rise. If you are not quite certain about how this might affect your financial situation, it is always essential to go slow and choose fixed interest rate approach.
It is important to check any additional charges, as some banks or societies charge penalties of early payment of the debt.
How much does it Cost You to Borrow a Secured Loan?
Perhaps this is the most asked question by people looking to borrow long-term loans. As with all types of loans, many factors are used to determine the amount of interest rate your lender will offer you. First, it will consider the duration of the loan, the amount of equity in the property being financed, and your credit score. Remember that secured loans are a good option for people with dented credit scores, as the security offered is considered as something that neutralizes the risk. However, even those with poor credit ratings might pay a higher interest than those with a desirable score.