The Two Main Types of Loans

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The services offered by lenders in the UK are so varied that they might confuse and overwhelm the first-time borrower. However, do you know that most of these loans simply fall into two categories? Most loans nowadays are just named differently and vary only slightly in terms, but the mechanics are still the same. To simplify it all, just categorize loans as either secured or unsecured.

Unsecured Loans

Unsecured loans, as the name suggests, do not require any means of security to get the loan. Because you don’t put anything on the line, you need to have a good credit score to avail of these loans if your finances are in order, and you don’t want to jeopardize or risk any of your assets, this is the loan for you.

Good credit is taken as a sign of financial responsibility, and so people who go for unsecured loans benefit from their good credit by gaining control over their payments. With unsecured loans, the payment duration is shorter and the interest rate is fixed. If your credit rating is really good, you don’t even need to pay for the first three months after getting your loan. This is called a loan holiday, which is an added bonus given to people with exceptional credit ratings.

Unsecured loans come in all shapes and sizes – not to mention names. It seems that every bank and financial institution name their unsecured loans differently in an effort to stand out. However, the mechanics are the same and these loans simply differ in interest rate, payment duration and other minor terms.

Secured Loans

Secured loans require a certain asset, physical or otherwise, to be surrendered to the lender as security for the loan. These loans are recommended for people with poor credit scores because they can’t avail of unsecured loans. To a lender’s eyes, if you have bad credit, you are financially irresponsible and are more likely to run away from your debts. Lenders trust people with good credit rating, so if you have poor credit rating and want them to trust you, you have to put up something as collateral.

You can use your home, your car and even your own paycheck as a guarantee to secure a loan. Compared to unsecured loans, secured loans are less flexible and borrowers have less control over the terms and conditions of the loan. Of course, this doesn’t mean that they can’t negotiate with the lender. Lenders will still tailor payment terms according to the borrower’s situation to make sure it’s easy for them to pay back their loan.