Is An Unsecured Loan Right For You?

Occasionally we all need a bit of extra capital for one reason or another. Perhaps a new car or luxury holiday. In some cases a larger amount is needed to consolidate other debts such as credit cards and smaller loans. There are two main types of loan secured and unsecured.

A secured loan is one which is backed by collateral. This is usually in the form of property which is called the security. In this case the property is forfeit if the loan is in default. This means the bank can repossess the property if the loan repayments are not kept up to date. The property will then usually be sold by the bank to pay off the debt. The amount of the loan can be tied to the value or size of the property. A loan tied to a home could be seen as a last resort as they can have high interest rates.

An unsecured loan is one in which no security is offered. This is more risky for the lender as there is no guarantee the money will be repaid. This means that usually the amounts available to borrow are smaller. Banks often have more strict underwriting rules for unsecured loans due to the risk.

An unsecured loan could be useful for people who need to raise capital but want reduced risk. Choosing this option means that a lender cannot repossess a house if repayments are defaulted on.

Which option you choose is entirely dependent on the situation.

Credit history can also be a deciding factor. If you have an unfavourable credit history, a secured loan may be one of the few options available. In addition, you may get a higher level of capital with a secured loan as there is less risk to the lender.

There are many loans available and a small amount of research on the internet will reveal a considerable number of options. For a large amount of capital it may be worth talking to an independent financial adviser to get the best deal for your individual circumstances.

If you would like to know more about loans why not ask AnswerBank Business and Finance.