Applying for any sort of financial aid can be stressful, particularly when there are a number of loan types with different criteria to meet. But one of the key elements to understand is the core differences between secured and unsecured loans. In this article, we will be showing you these key differences and looking into how it can affect the amount you are allowed to borrow.
What Is A Secured Loan?
A secured loan is a loan that is backed by collateral. This collateral is commonly in the form of motorcycles, cars and homes and it put up as security for the borrowing amount. This is given to the lender as an incentive to keep the borrower paying back the loan on time. This collateral will cover you if you are unable to pay the loan as the lender has the right to repossess items to the value of the amount borrowed. This form of loan is most commonly used for £100,000 secured loan or a mortgage on a house.
What Is An Unsecured Loan?
An unsecured loan, however, does not require any form of security. This is beneficial for those that are only looking to borrow on a small scale as there is no security involved. This lack of security makes the application process a little bit longer than that of a secured loan. The delay in the application is as a direct result of the checks that need to be conducted when applying for a loan of this nature. This is, therefore, making the application process a little bit longer as applications need to process through pre-approval and a number of eligibility checks.
How Are They Different?
Though both these loan types are similar to each other, there are key and distinctive differences that you need to remember about the two. One of the biggest changes is the collateral. Secured loans are often applied for either online or through a bank and often times have a longer paying back period. Though this is not the case with every secured loan, loans such as mortgages have a longer time frame. Another element that makes them different is the ease of application.
Due to the collateral that is put up when applying for a secured loan, it is easier to be approved for this type of loan much faster than you are an unsecured loan. Though this is a process that still requires a vast number of initial checks, this can provide you with a higher borrowing amount. This is great particularly for those that are in financial difficulty as this can help to fund repairs to the home or an unexpected car breakdown as it allows you to borrow more.
How Does It Affect Borrowing Amount?
In addition to a number of the key changes, the biggest one is the borrowing amount. Due to a secure loan requiring collateral you are oftentimes able to borrow more than you are with an unsecured loan. This is due to the reduced risk to the lender should you be unable to meet repayments. Therefore, it is important to consider both your options when looking to take out a loan as one type could be better suited depending on the project.
In addition to this, an unsecured loan is also required to be paid back within a year. This is different from that of a secured loan and repayments will need to be met. If you default on a payment with no unsecured loan, there is no protection this will mean that repayment rates will increase with interest. If you think that you are going to default on a payment, it is important to get in contact with your lender to discuss altering your repayment method.
How Do I Apply?
Applying for a secured and unsecured loan is easy, you can either apply online or in a bank or third-party lender. When applying, there will be a number of eligibilities checks as well as affordability checks. This is because the lender has a duty of care under the FCA regulation. This, therefore, means that lenders are required to ensure that you are able to pay back the money that you are borrowing. If they look into your credit score and see that you have had a bad history with finance, you are less likely to be accepted for this style of loan and will need to apply for a bad credit loan specifically.
With this in mind, there are a number of benefits and drawbacks to secured and unsecured loans that can aid you in times of financial troubles. Whether you have an unexpected breakdown or a broken boiler, these loan types can benefit you.