Secured and unsecured types of loans

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Secured and unsecured types of loans

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A loan is a lending of anything especially money that has to be paid back to the lender in future. The one borrowing the money is called the borrower or recipient of money. The borrower usually has to repay the original amount of money borrowed along with the interest over it.

To ensure the evidence of all this exchange, a document is formed with all the details of the exchange on it like the sum of money being lended, the names and signatures of the lender and the borrower, the rate of interest and the date on which the loan has to be repaid completely.

Loan providers can either be banks, credit card companies, groups of people who do this as a business that is the pier to pier lending group, families of friends or other institutions.There are many different types of loans available that one can take. It will help you decide what type of loan you need to get according to your situation if you understand its different types.

Secure personal loan is a type of personal loan that as the name indicates, needs security. The borrower has to offer something like an asset as a collateral to secure the loan. Mortgage loan is also a secure loan in which the borrower gets a loan to buy a residential property. These loans are less risky for the lenders and so they don’t make high interest rates on these loans. But they are more risky for the borrower because if they fail to payback the debt or default, the lender has the legal right to repossess the collateral be it your car or property as happens in mortgage loan default.

Unsecure loan is another type of loan. How unsecured loans work is not that difficult to understand. It is a straightforward type of loan in which there is no collateral like a car or house in case one default their loan. It is also called signature loan which means that it only requires the signature of the borrower and not any asset. Your credibility for the repayment of loan is determined by your credit score or credit report. If you have a higher credit score, you will become a good candidate for the loan.

But if your credit score history is weak, you would be required to have a co-signer who would act as a guarantor for you like a friend or family member. So that if you fail to pay back the loan in the required time, they would be responsible and pay your debt. There are many packages available for an unsecured type of loan. They are credit card debt, personal loans, bank overdrafts, credit facilities or lines of credit, secured or unsecured corporate bonds, peer-to-peer lending. The interest rates are different for different borrowers and lenders.

Because of absence of collateral in this type of loan, the interest rate tends to be higher than that in secured loan. Inability to make timely repayment may lead to additional charges and damage the borrower’s credit rating. The lender can sue the borrower for this.