Secured loans are loans where you need to put forth an asset as security or as collateral to borrow funds. Secured loans are generally for larger sums of money than personal loans. You get a generous repayment period together with lower interest rates, as well. Most secured loans are granted against a mortgaged property.
The lender then calculates the Loan To Value ratio (LTV) of the house and assesses the applicant’s ability to pay. The application is more likely to succeed when the loan amount requested is not greater than 70% of the market value of the property.
In general the amount lent on a secured loan application is decided by the equity you have in the house, your capacity to repay and your current financial situation. While you will do very well to seek professional advice from a service that offers online secured loans, it’s important to be financially literate yourself.
Secured loans come with worrying downsides
Secured loans are not as rigid as they used to be. In the past it was difficult to get out of an arrangement or to adjust the terms of a mortgage.
The banking industry is a lot more flexible these days. In the past it was very difficult to terminate a secured loan prematurely and penalties applied.
Fast forward to the present day and you can ask to have your mortgage reviewed. It is quite common for lenders to now adjust the period of repayment, discuss the interest rate applied and even consolidate unsecured debts into a mortgage.
If you sell the property and seek early termination of the loan contract, administrative fees apply that are usually no more than a months repayment amount.
In general, an applicant with a good credit rating is more likely to attract a smaller interest rate. Applicants with poor credit ratings scan still apply, however as they show a higher risk of repayment default, this increased risk is usually reflected in a higher interest rate offer.
Defaulting on a secured loan means that you are likely to lose the property you have offered as collateral.
This is not a regular occurrence and the lender is likely to avoid this scenario by identifying with the applicant what the circumstances are about the inability to pay. They may offer some flexibility in repayment and extend repayment time.
Ultimately however, if the client continues to be in default for an extended period of time, the lender is likely to seek a legal remedy which can even result in the seizure and selling of the property.
What is an Unsecured Loan?
Unsecured loans are personal loans where no collateral is offered. They can take many forms such as personal loans, car finance and even credit cards are classified s unsecured debt.
These loans are usually modest ones. They are lent over shorter periods, the rates of interest tend to be higher and the amounts lent are lower than secured loans. There are a number of financial institutions that offer unsecured loans.
An applicant’s credit rating is usually the most important factor in a lender’s decision. They usually base their call on the quantum of the loan and the interest rates to charge on their risk analysis of the applicant.
Defaulting on a secured loan, even missing on a single repayment will negatively impact your credit rating and jeopardise you chances of having access to loans in future.
As opposed to secured loans however, there is no collateral put forward for the loan, so the lender does not have the ability to lay claim on your assets. This being the case, the lender can seek damages in courts of law and the costs can become substantial if fraud is involved in the default.
Perhaps the most significant upside to unsecured loans is that they come with no penalty for early redemption – something that borrowers have to accept on secured loans.
Which kind of loan is right for you?
Making a decision between secured and unsecured loans comes down to what your needs are.
If you need a very large loan or if your credit ratings are not good enough for an unsecured loan, a secured loan is a viable option. However, you have to make sure before you apply for a loan that you have the financial capacity to repay the instalments.
If your credit rating is good and you can settle for a smaller loan, an unsecured loan may be the way to go.
Seeking financial advice or spending time with a lender, presenting all your financial facts and going through all the options is usually the best way on helping you decide which loan is more effective for you.
Chris Hughes is studying for his Economics Degree. In his spare time he enjoys sharing his research and ideas online.