Tuesday, May 3, 2011

Secured Loan Vs Unsecured Loans?

Often in our search for finance options, we are led into a crossroad where we have to make a choice between secured and unsecured loans. Both are equally alluring and put the borrower in a difficult spot. It is difficult to make up the mind regarding one particular finance option because each has their share of advantages and disadvantages. Depending on our financial situation, we will have to choose which loan is best for ourselves.
Lets understand the basic crux of secured and unsecured loans.

Secured Loan: A loan backed by assets (e.g. a car or property) belonging to the borrower in order to decrease the risk assumed by the lender. The assets may be forfeited to the lender if the borrower fails to make the necessary payments. From the creditor's perspective this is a category of debt in which a lender has been granted a portion of the bundle of rights to specified property. Usually in secured loans the end use of loan amount drawn is given.

Following are the examples of the secured loans:
Car Loan is taken to buy a new/used car.
Home Loan is taken to buy or construct or rennovate a home.
Car Overdraft is taken as a loan against mortgaging your car, but you can use the amount taken for your any personal use.
Loan Against Property is also a form of secured loan where your pledge your asset and use the amount needed for consolidating your debt or foe any other end use.
Secured Business Loan can also be secured if any asset (machinery, stock, raw material, building etc) are pledged against the loan amount required.

Unsecured Loan: With this type of loan, you do not need to put your collateral against the loan. The loan is given on the basis of your income and expense behavior.
Following are the examples of the unsecured loans:
Personal Loans is the most common form of unsecured loans, which is referred to as all-purpose loans; they are ideal to buy a product for which you do not have ready liquidity.
Unsecured Business Loan, as the name explains is a type of loan that doesn't require a collateral. It is typically at a higher rate of interest and is taken for a comparatively smaller tenor.
Credit Card loans Credit card is the most flexible form of short-term borrowings with easy repayment options.
Bank Overdraft is also a form by which you can avail unsecured finance from your bank for your business.

Now lets understand how to make the choice between the two. Answer the following questions:
Which type of loan I should opt for?
Which type of loan will save me rate of interest?
Do I have any asset to mortgage?
For how much duration do I need the credit?
What is the end use of the finance I need? Is it commercial or personal?

Lets take an example to clear the apprehension. Suppose you need loan / finance for your business. In that case, which loan you should go for secured business loan /unsecured business loan/ mortgage loan?
If you have any asset to pledge then you should make a choice between secured business loan and mortgage loan. Now we should compare on the following aspects:

Loan amount offered and needed in both the scenarios.
Rate of interest: Loan Against property will have comparatively lesser rate of interest than secured business loan.
End Use: In case of business loan the loan taken has to be specifically to be used for only business purpose as mentioned. But in Loan Against Property the loan taken can be used for any purpose like business, education, marriage etc.
Tenor is also a key point, which also varies for every type of loan.

Thus, Secured loans offer lower interest rates and better loan repayment terms, such as extended repayment options or variable interest rates. Secured loan borrowers can also often choose between a fixed and variable rate (Home Loan), as well as decide to pay nothing for the initial term of their loan. This ultimately means that secured loan applicants have greater financial flexibility and more savings options than unsecured borrowers.

Unsecured personal loan are better for those people who are in a need of instant financial assistance as these loans have a minimal paper work. The approval process is also very quick and there is no appraisal of the collateral item.

Before going any further and making any concrete decision you should be familiar to all the aspects of the both the type of loans. It all begins from choosing a suitable lender and deciding a fixed rate of interest, which you can repay comfortably. If all these factors go hand in hand then only the particular choice will be beneficial for you.

non secured loans

Seeking a non secured loan can mean obtaining needed cash without placing any item of personal property at risk. These loans get their name from the fact that there is no collateral involved to serve as security for the debt that is being undertaken. The offering of collateral will in general reduce the risk to the lender since an item of value can be seized if the borrower should default on the loan. In the non secured loan, there is no such safety net. A lender is depending on the honor and good name of the borrower for assurance that the debt will be reimbursed. Of course, since there is more risk being assumed by the lender, there will be higher costs associated with these lending opportunities. These costs will usually come in the form of higher interests rates as well as the possibility of extra fees. However, if a potential borrower has excellent credit, these costs may not be excessively high. A borrower may have to be satisfied with a smaller loan amount when there is no collateral accompanying the loan.

There are many features that could influence the interest rates and any additional fees. A borrower's prior credit history could be a factor. Lenders understandably prefer to lend money to individuals with excellent credit and a solid track record for making good on any previous loans. With some lending agreements, the borrower is able to decrease the amount of interest paid if that borrower takes pains to make all payments on time. There are a number of different examples of the non secured loan. Some financial providers cater to individuals with poor or no credit. While it can be very easy to attain loans from these providers, the lending terms can be very steep. Anyone who obtains a poor credit non secured loan should expect to pay much higher interest rates. Many of these loans are extremely short term and are known as pay check loans or quick payday advances. The criteria for these short term loans will usually include little more that proof of age, Unites States citizenship, full time employment, and an active bank account. Longer term loans can be financed over a period of years and can be used for such things as home improvement, vacations, debt consolidation or any number of other purposes. These loans will also often require a minimum amount of documentation and offer speedy approval.

This kind of lending opportunity may be known by several names including signature loans and personal loans. Attained mostly through the good name of the applicant and the size of the applicant's income, they can be a little more difficult to get than shorter term financing. Since there is no collateral attached, there is much less risk to the borrower. Within the category of the non secured loan there are different types of loans. Personal loans are repaid by the individual borrower. Unsecured business loans represent debt that is taken on by a business. A third category is something called the unsecured business loan with a personal guarantee. This last approach gives the lender a little extra cushion in that in the event of a business default, the lender can turn to the individual borrower for repayment. Anyone attempting to build a new business knows the importance of attaining funds to help the business grow. A non secured loan can provide those funds. The Bible talks about what a blessing it is to give praise to God. "I will praise the Lord according to his righteousness: and will sing praise to the name of the Lord most high." (Psalm 7:17)

There are many reasons for seeking a non secured loan. Some individuals use this unsecured debt to pay for such expenses as education, debt consolidation or even vacations and luxury items. Potential borrowers should always take care to make sure that the reason for borrowing justifies the debt that will be undertaken. In addition to the standard loan framework, there is also the availability of the unsecured personal line of credit. Using this approach, the borrower can attain funds at their own discretion, calling upon the line of credit only when needed and, consequently, only borrowing what is actually necessary. There are financial services that can help an individual or business decide what kind of lending approach is the best fit for them as well as matching the individual or business up with the appropriate lender. Those with a solid credit history as well as businesses with a healthy profit record and business plan can generally attain financing at reasonable interest rates and agreeable terms.

The main difference between the non secured loan and secured loans is the presence of collateral. Home mortgages are generally examples of secured debt since the house itself serves as collateral for the mortgage. Any time that a piece of property such as a car or items of furniture serve as security for a loan, that property can be taken away from the borrower if the borrower fails to make the payments. The benefit of unsecured loans is that there is no property that will be lost in the event of default. If a home is used as security for a mortgage, the financial institution that lent the money in the first place has the right to seize the home and place it up for sale in order to repay the debt if the borrower defaults. Many borrowers believe that unsecured loans are always a better deal that secured ones. As long as a borrower's credit score is high enough, the cost of this unsecured debt is not prohibitive.

What are Secured Loans?

Secured loans are those loans that are protected by an asset or collateral of some sort. The item purchased, such as a home or a car, can be used as collateral, and a lien can be placed on such purchases. The finance company or bank will hold the deed or title until the loan has been paid in full, including interest and all applicable fees. Other items such as stocks, bonds, or personal property can be put up to secure a loan as well.

Secured loans are usually the best way to obtain large amounts of money quickly. A lender is not likely to loan a large amount without more than your word that the money will be repaid. Putting your home or other property on the line is a fairly safe guarantee that you will do everything in your power to repay the loan

Secured loans are not just for new purchases either. Secured loans can also be home equity loans or home equity lines of credit or even second mortgages. Such loans are based on the amount of home equity, or the value of your home minus the amount still owed. Your home is used as collateral and failure to make timely payments can result in losing your home.

Other types of secured loans include debt consolidation loans where a home or personal property is used as collateral. Instead of having many --usually high interest-- payments to make each month, money is loaned to pay the original lenders off, and the borrower then only has to repay the one loan. This is not only more convenient but it will also save a lot of money over time, since interest rates for secured loans are lower. A debt consolidation loan usually offers a lower monthly payment as well.

On the other hand, unsecured loans are the opposite of secured loans and include things like credit card purchases, education loans, or bank notes, which usually demand higher interest rates than secured loans, because they are not backed by collateral. Lenders take more of a risk by making such a loan, with no property to hold onto in case of default, which is why the interest rates are considerably higher. If you have been turned down for unsecured credit, you may still be able to obtain secured loans, as long as you have something of value or if the purchase you wish to make can be used as collateral.