Secured And Unsecured Loan Types
There are two main types of loans in the market – secured and unsecured.
Secured Loans
Secured means that the loan is attached to a tangible asset – such as a house – and if the borrower does not repay what is due, the asset can be seized and sold by the lender to recoup their loss.
Unsecured Loans
Unsecured loans are slightly different – the lender provides on trust that the borrower will make the repayments in full and on time. If the borrower does not repay what is due, the lender does not have anything that they are immediately entitled to seize.
For this reason, unsecured loans are slightly more risky for the lender as they are taking a chance on the borrower`s ability to repay and this is reflected in the interest rate, which tends to be much higher than on secured loans.
How Much Can You Borrow?
The amount which can be borrowed on an unsecured loan is usually for a far smaller amount than on a secured loan and is repayable over a period of 1-5 years typically, although some lenders will extend the term to 10 years for large unsecured loans.
Unsecured loans usually offer less flexibility than secured loans, which often allow the individual to over pay and take holidays on their repayments.
However, secured loans are far more rigid in other ways, as they can only be offered on assets which are tangible and could be reclaimed and sold on, meaning that they are unsuitable for purchasing smaller value or paying for transient costs, such as a wedding or a holiday.
Payday loans and doorstep lenders are technically a form of unsecured borrowing but the extortionate interest rates put them in a very distinct category of their own within unsecured loans.
Unsecured Loans For Bad Credit
It is possible to obtain an unsecured loan even if you have a bad credit history – there are a number of providers which specialise in offering finance to those who have had problems in the past. However, the interest rates will usually be higher than those offered by most high street lenders.
As the interest rate is so much higher for unsecured loans, they are better suited to smaller, less expensive purchases which can be repaid over a short period of time.
What To Use Them For
Whilst an unsecured loan can be obtained for many different purposes, providing the lender agrees it is affordable, it is a good idea to think carefully before splashing the cash.
Having a dream holiday on borrowed funds may sound like a good idea at the time but having to pay back the money for 12 months or longer, with a healthy dollop of interest added in, can end up being a significant financial burden long after the tan has faded.
How Fast Can You Get One?
Because of the lack of assets being secured obtaining a personal loan can be very speedy and some lenders are able to provide the cash within 24-48 hours of application, depending on the circumstances.
Applying for a personal loan with your own bank can often be a good option to consider, as they will have access to your financial history on your account and may be more amenable because of your past relationship.
Requirements
You may be asked to provide less documentation as well, which can speed the process up.
Some high street banks prefer applicants to go into the branch to run through the loan process with a financial advisor but others provide the facility to apply online, with an in-principle decision often available automatically within minutes.
More complex or borderline cases may be referred to an underwriter for a more detailed assessment before agreeing to provide the finance.
What If You Are Declined?
If you are declined outright via an online application process, it may be possible for the lender to refer your application to one of their underwriters for a human decision, which may possibly result in a different outcome.
Other Options
Whilst unsecured loans are commonplace and used for a wide variety of expenses, there can be cheaper ways to fund a purchase.
For example, if the cash is needed to buy something for the home such as a new sofa or a TV, some places will allow customers to repay in interest-free instalments which would work out far cheaper than a loan.
Another option would be to use one of the current credit card deals in the market right now. There are several providers which are offering 0% interest on purchases, with some deals lasting up to 24 months.
Providing the purchase is paid off before the 0% interest period expires, this would also be a good alternative to an unsecured loan.
To track down the best deals in the market, it is best to carry out a credit card comparison by either researching providers yourself online or by visiting a specialist website which lists all the current rates available.
