Loans are supplied for all kinds of reason. Some borrowers might wish to buy a house or new car, while others might need an injection of cash to pay for a holiday or home improvements. Whatever their reasons for making a loan application, borrowers are likely to encounter just two types of loan: secured and unsecured.

Secured Loans

A secured loan simply uses the borrower`s property as security for the loan. This means that secured loans are only available to homeowners; however, some lenders do provide secured loans for people who do not own their own homes but have guarantors who do. The obvious risk of a secured loan is that defaulting on repayments could result in the borrower losing his home.

Unsecured Loans

An unsecured loan is different from a secured loan in so far as the lender does not require the borrower`s property to be used as security for the debt. This does not, however, mean that a homeowner who obtains an unsecured loan would not lose his home if he defaults on repayments. Lenders can use Charging Orders to demand the sale of assets belonging to borrowers who run up bad debts. The proceeds from the sale of assets are used to pay off any outstanding debts, so it is still possible for those with unsecured loans to lose their homes.

Unsecured loans tend to be for relatively small amounts of cash. Most unsecured loans range from £1,000 to £25,000, with the majority of accepted applications being in the region of £5,000. Because no security is provided for the debt, unsecured loans are usually subject to higher rates of interest than secured loans. When deciding whether or not to apply for an unsecured loan, prospective borrowers must weigh the benefit of receiving an immediate lump sum of cash with the affordability of repayments and the total cost of interest over the repayment period.

Why Take Out a Loan?

Many people apply for a loan because they need an injection of cash for a specific purpose. As mentioned above, numerous unsecured loan applications are made every year so that borrowers can spread the cost of an expensive purchase over several years (typically between one and ten).

Buying a new or used car is one of the most common reasons for obtaining an unsecured loan. Alternatives to an unsecured loan used for this purpose include hire purchase and personal contract purchase. Although options for car finance have improved markedly in recent years, an unsecured loan is preferred by many because it provides car buyers with an excellent bargaining position – car dealers are rarely able to resist cash purchases, even if they have had to haggle with customers.

Borrowers might also use an unsecured loan to pay for a family holiday, which might be too expensive unless the cost is spread out over several months or years. Home improvements are another popular reason why people apply for unsecured loans. New flooring, paint, tools, decking, fencing and even new kitchen units and equipment cost a considerable amount of money. Using an unsecured loan to pay for such items can be convenient and cost-effective.

Finally, one of the most common reasons why people apply for unsecured loans is to consolidate existing debts. During times of economic uncertainty, many people experience financial difficulties, especially with credit cards and purchase repayments. An unsecured loan can reduce monthly outgoings by providing the borrower with just one repayment at a potentially generous interest rate. If an applicant is refused credit from the leading lenders, he might still be able to obtain a loan for bad credit at a higher APR.

Saturday, March 31st, 2012 at 7:38 pm
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