Secured Versus Unsecured Loans
Secured Versus Unsecured Loans
Secured Versus Unsecured Loans
There are always people looking to borrow money, but it can be difficult decision knowing which type of loan to apply for.
If offered the choice between secured or unsecured most, if not all people will opt for an unsecured loan, on the basis there is less risk for them. However, with the credit crunch, the market has changed considerably, so this may not be the best choice.
Historically lenders have been bending over backwards to lend money to people and unsecured loans were extremely easy to come by in fact some would say too easy.
Now, the lenders offering the best rates are looking for reasons not to lend to people, and so if somebody has missed a single credit card payment this can be enough to reject an application.
The best unsecured interest rates are currently only available to about 5% of the population i.e. those with an A star credit rating, and who own a property. Why is this?
Well, should you default then they will look to place a charge on your property, thereby effectively turning it into a secured loan.
There are a couple of points to make here.
First of all, unsecured interest rates are always higher than secured loan interest rates because the lender is in theory taking more of a risk. However, presumably you would not take out a loan if you think there was any realistic chance you would default on it and therefore it might make sense to take advantage of the lower rate a secured loan offers in the first place.
Secondly, if you apply for an unsecured loan and are turned down, this leaves a footprint on your credit file, which will be viewed by any other lenders as a concern. If you make a number of applications in quick succession trying to find an unsecured loan, then this will look like you are in financial difficulty and could lead to you being turned down by a lender who might otherwise have lent to you had you approached them first.
Where does this leave people, who either have no property, or have a less than perfect credit history?
Well, if you have no house to secure the loan against, you will need to find somebody to act as a guarantor, who will need to own a property. This means that should you default the lender will chase them for the money and so it is doubly important you are confident of being able to make the repayments. The interest rate on this type of loan will also be high.
If you own a property but have missed payments recently, there are lenders out there who are still prepared to give you the money, but expect to pay a high level of interest in excess of 30% and as high as 45% possibly.
The bottom line is that understanding the current market and knowing what you can realistically afford to repay is more important than ever if you want your application to be successful and you do not want to risk damaging your credit rating. Of course everybody is in a different situation, but knowing the facts might help you make an informed decision rather than applying randomly for the lowest rate you see.
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