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Your Guide To Secured and Unsecured Loans


Applying for a loan is a big deal, and it may cause you to feel quite overwhelmed if you do not know the different types of loans available to you, and how to apply for them. Do not panic, this guide will explain what you need to know before applying for a loan. 

Your credit score will play a big part in whether you will get accepted for a loan or not. Make sure to keep a close eye on it, as it can change. Your credit score is an indicator of the likelihood that you will pay your debt back rapidly. Lenders use this to decide how high risk you are to lend money to, so make sure your credit score is the best it can be can improve your chances of being accepted for a loan. 

Secured Loans

Whilst there are many different types of loans, with different features, they mainly fall into two categories: secured and unsecured. Secured loans are loans where the collateral is required as security to make sure that you complete the payments. Collateral is something that holds some form of economic value, and it is taken if your debt is not repaid. It is usually some form of property, such as a house, or other forms of real estate, or a car. The collateral can be taken and sold to repay either some or all of the outstanding debt if not paid. Whilst this may seem risky for borrowers, secured loans do pose some advantages, such as a higher chance of acceptance and lower interest rates. To a certain extent, secured loans are rather easy to obtain, as lenders tend to accept people with lower credit scores than they would with unsecured loans. It is specifically the requirement of collateral that makes secured loans a lot more risk-free than for borrowers. In addition to this, lenders have additional ways to getting the money paid back, such as suing and filing negative credit information on a report.

Secured loans also usually allow for larger amounts to be borrowed, especially if you are making a large purchase like a mortgage or home equity loan. 

Unsecured Loans

Contrasting secured loans, collateral is not a part of the process for unsecured loans. This loan makes credit score a lot more important, as they tend to ask for higher ones to reduce the risk. Because they do not ask for collateral, they have no insurance if the borrower did default; they would have to resort to negative notes for a credit report or suing to get the debt owed. Because of this riskier nature to the loan for lenders, there are fewer benefits associated with it, for example, higher interest rates and lower borrowing limits.

There are many different types of unsecured loans that you could apply for: an unsecured personal loan, student loan, credit card, or medical loans to name a few. Some, but not all, business loans can be unsecured as well. 

Pros And Cons

Still, struggling to see which might be the best one for you? Take a look at the pros and cons for each type, as well as what situations they might be better used in:

Secured loans could be better used for larger purchases, such as housing or car purchases, as lenders tend to offer quite high borrowing limits due to the low-risk nature of lending the money. As well as this, lenders tend to be quite accepting of lower credit scores, as they have some form of insurance from the borrowers if they default. Secured loans can also be better, as they tend to offer lower interest rates on repayments. However, it can be a lot riskier for the borrower as they risk losing valuable assets that they own due to defaulting. If you are buying a property for the first time with the loan, for example, they have the power to own the rights to that property until all of your outstanding debt has been paid. 

When it comes to unsecured loans, they might be the better-suited option for people who have a higher credit score and a steady income, which would help to make repayments a lot easier. In addition to this, it could provide you with better interest rates which will be hard to come by otherwise (with unsecured loans) due to the high-risk nature of these loans for lenders. Whilst no collateral means that you don’t immediately lose property or your car, it doesn’t mean that there are no consequences for defaulting on payments; lenders still have the opportunity to sue you for the remainder of the money you owe them. As well as this, it becomes a lot harder to qualify for these loans, as most lenders will be looking for extremely high credit scores, and therefore people they can trust to keep up with repayments. In short, this type of loan is particularly exclusive to those with a decent credit score. 

Hopefully, this guide will have taught you about the different types of loans and what might be best for you. 

The Importance of Credit Scores

As mentioned, having a good credit score is essential when attempting to gain credit, whatever that might be, of course, this includes all types of loans. Building credit relies on the ability to successfully make payments on time, such as contract phones, for example. If you have not taken on such expenses previously, you will likely find that your score is not good, since you have no proof of successfully re-paying money owed or paying bills on time. Credit scores change all of the time and you can quickly improve or worsen a score by taking different actions. There are many services that allow you to do a credit score, and it will be worth considering if you get rejected for a loan. You might be able to ask your bank for a free credit score, a useful tip for those wanting to move forwards with this. 

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