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Secured or Unsecured Loans - That is the Question

Written By Devi Kristanti on Tuesday, August 12, 2014 | 12:32 AM

You may think that loans are simply sums of money you lend off the bank for large expenses, perhaps home improvements. In some cases loans can help pay off debts elsewhere and then you pay it back in more manageable repayments. This is fundamentally true but like most financial matters there are a number of options to cover all eventualities.

One of these factors is that loans are categorised as either secure or unsecured, these terms may confuse you over who is "secure". A secured loan means that the borrower is going to put up some form of surety to the lender, in most cases this would be the borrower's property and so this type of loan favours the property owner, however other collateral like stock and property can be accepted in some cases. Where as unsecured loans need no surety since the lender trusts you are capable of making the repayments.

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It's a scary prospect for borrowers putting their homes on the line for a loan; however the risk often means that you get a much more manageable loan. Since the lender is confident that their investment will be returned (in some form, be it repayments or property) they are prepared to lend more money over a longer period of time. Secured loans can total up to £75,000 while an unsecured loan can be expected to be capped at £25,000.

Secured loans are normally permitted to be paid back over a longer time and so are subject to lesser interest rates. The time period for repaying secured loans can range from three years up to twenty five, as long as the interest rate isn't eating up more money then you may decide to repay your loan over a longer period of time as it would equate to the loan repayment being smaller each month. It's worthwhile checking with lenders over their policy for repayments as some have a policy of issuing penalties for repaying loans earlier than agreed upon.

The majority of personal loans offered and sold on the high street are unsecured, with 90% being classified as unsecured. These tend to require quicker repayments compared to secured loans, although for the amounts being lent a repayment period of 5 years isn't unreasonable. The main concern with unsecured loans is that interest rates are higher and so that gives a further incentive to pay off the loan quickly.

The main factor to watch for apart from the lowest APR is that since unsecured loans are measured against credit ratings you may not necessarily get offered the lowest APR if you are a high risk borrower. However this is not something to worry about as a difference of 1 or 2% over three or five years isn't something to be concerned with. Again the main point to consider is whether there are any early settlement costs.

So as this article illustrates, there are significant factors to take into consideration when choosing a loan. A secured loan can be paid off over longer periods, and offer more money at the expense on having to put up a sizable collateral. Whilst an unsecured loan is a shorter term deal with greater interest but determined by your credit rating and not needful of any collateral.

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