Personal loans
While there are a number of different personal
loans available in the UK finance market, these will basically fall into one of
two distinct types – either secured or unsecured. In basic terms a
secured loan
is one that has the borrower offer some form of collateral to cover the loan
amount, and in the case of default on the repayment, the lender has the right to
force the sale of this collateral in order to recover the money that they have
lent.
The major benefits of
secured loans are down to
the fact that the lender is not exposing itself to a large risk of non-payment
because they are able to recoup the amount by a forced sale in a worst-case
scenario. When calculating the rates of interest to charge, the risk exposure is
an important factor that is taken into account, and the lower this is the lower
the interest rate should be. As well as a lower rate of interest when compared
to unsecured loans, higher borrowing amounts are also available with a secured
loan, often up to the value of the collateral that the borrower provides, making
this type of loan suitable for a wider range of uses.
There are drawbacks to these types of loan
however, for one thing you may not have the collateral required, which is
normally in the form of your house. Even if you are a homeowner you may not fell
comfortable in putting your home up as security, as there is the risk of
repossession if you are unable to meet the repayments. If you are not in the
position to get a secured loan, or if you simply would prefer a different
option, then an unsecured loan is your only other option.
In general terms unsecured loans will have lower
borrowing limits, and slightly higher rates of interest, however they are
usually quick to arrange and are available to you even if you are not a
homeowner, making them suitable for a wide range of people and uses.
The type of loan that you choose will be
dependant on your needs and your circumstances, if you are a homeowner then you
will have the option of both forms. Generally secured loans are better suited to
large loan amounts, perhaps to fund major home improvements for example, whilst
unsecured loans are better for smaller amounts that will be repaid over a
relatively short period of time.
When determining the rates of interest to charge
on the loans, the lenders will take into account a number of factors, including
the risk to them of non-repayment and the costs involved in trying to regain the
money from the borrower in worst-case scenarios. The facts are that the risks
and associated costs to the lender are less on secured loans, which is why these
will always offer lower interest rates when compared to the unsecured variety.
|
