Personal Loans: Secured or unsecured
If you are thinking about taking out a personal loan it's a good idea to get familiar with the types of loans on offer, especially the difference between secured and unsecured loans. Lending institutions offer both but which one is best for you?
Secured personal loans
Regardless of how much you want to borrow, you should ensure that you know the difference between a secured loan and an unsecured one so that you can make an informed decision as to which will suit your needs best. Secured loans are often used to get funds for home equity and renovations, business loans and other major purchases like a car, boat or caravan.
Secured loans require you to surrender something of value to the lending institution which will become the collateral until the loan has been repaid. Such collateral could be:
- Property deeds
- A car or boat
- Items of jewelery
- Art pieces
In the event that you fail to repay the loan, the lending institution is entitled to sell your security item to recoup their money and if the sale doesn't cover the full amount of the loan, you will have lost your property and still owe money!
Information about unsecured personal loans
With an unsecured loan you are not required to surrender anything for the purpose of collateral. While this means that you will not lose anything other than your credit rating if you fail to pay, it should be noted that the interest rates on unsecured loans are usually much higher than those generated by a secured loan. As a result, unsecured personal loans are much harder to get as the lending institution will not have anything of value to hold as security against the loan.
Unsecured loans are what people apply for when they need money for student loans, small business loans, and extra funds to carry out minor household repairs and for small personal loans.
The main rule though, whether you are looking at a taking out a secured or unsecured loan is to make sure that you don't borrow more than you can afford to repay.
Using a guarantor for an unsecured personal loan
Another way to increase your chances of being granted an unsecured personal loan is to ask someone to be a guarantor.
Usually this will be parents of grandparents, who have assets and will sign a legal document promising that if you fail to pay your loan debt, that the bank can take the guarantor's assets.
Even though the bank can come after the guarantor first, they usually come after you as the debtor first. Also if they do take your assets, the guarantor is still not off the hook. For example if your assets are equal to ten thousand dollars but the debt you owe the bank is fifteen thousand, then the guarantor is still liable for the other five thousand.
The other way for the bank to take what you owe is to simply go straight to the guarantor. Keep in mind this does not mean you can go borrowing money, never pay it back and get away with it. After the guarantor has paid your debt to the bank, they have all the legal rights that the bank would have had to chase you for the debt they had to pay. This means you could be getting sued by granny.
Of course this is only in the unfortunate cases, if you are responsible in paying back your debt, at the end of the loan the guarantor is off the hook. This is one of the best ways to gain an unsecured personal loan, especially for those with no assets, such as students or people starting out their financial life.