Secured and Unsecured Loans in the UK
June 2, 2009 by Rhonda Brown
Filed under Credit Debt
They say that all men are born equal, but this is not true when it comes to finances. The fact is that a person’s inherited family background, responsibilities, circumstances, and other factors, shore up and determine one’s financial status. When there is a gross disparity between the income and the expenses in a person’s life, they are forced to prioritize and there are circumstances when they are forced to borrow.
It is not always the people who have financial problems who go in for loans. People who want to expand their dwellings, or who want to live a sensational and adventurous life by traveling far and wide, and even those who just want to consolidate their liabilities, all look for loans.
There are two types of loans. One is secured and the other – unsecured. In a secured loan, the borrower is expected to give an asset as a collateral for the loan. The asset may be a home, a car, stocks or any other high-value item. If there is a failure in repayment of the loan, the lender has the right to sell the asset and that’s how they will recover their dues.
In a secured loan, the advantages are that the money lent can be quite high and the repayment period is long. The lender also feels secure because they have the collateral to back-up the lending. In secured loans, the rate of interest is cheap. Secured loans may extended to even persons with a poor credit history.
No asset need be given as a collateral in the case of unsecured loan. Money is lent on the basis of the credit-worthiness of the borrower, their track record in repaying previous other loans, etc. Once this is ascertained, the lender decides the amount that can be lent, the rate of interest to be charged and the repayment period. Usually the amount lent in unsecured loan is relatively small, the rate of interest charged is high, and the repayment period is shorter than that of a secured loan. A guarantor may be required to sign the papers along with the borrower so that the lender can recover the dues from the guarantor if the borrower fails in his repayment.
In an unsecured loan, since no asset is given as collateral, the question of the borrower losing the asset does not arise. The borrower can just pay back the loan and heave a sigh of relief in view of the relatively short period of repayment.
Sometimes, loans are raised to kick-start the borrower’s business or for expansion of business. Other loans must be treated as temporary bail-outs. They are only quick-fix solutions. Borrowers should not get swayed by the availability of loans and become habitual borrowers.
Usually lenders are very strict and they will be obstinate in insisting on timely repayments. Hence, one should think of loans only as the last alternative. If such a situation arises, there should be concrete plans for repaying the loan on time.
