Personal loans - loans made for your personal use rather than for a
business use - can be sorted out into two basic types: secured loans
and unsecured loans. There is one major difference between secured loans
and unsecured loans, but that big difference leads to a lot of little
ones.
Unsecured loans are those loans that are made without any type of
collateral or security to guarantee your repayment. A lender who offers
unsecured loans will lend you money without requiring you to sign a lien
against your home, or asking you to hand over some property to be held
until the loan is paid off. Your promise to pay back the loan under the
terms agreed upon is all the guarantee that the lender has that you'll
make repayment.
Secured loans require that you put up something that you own as a
guarantee that you'll pay back the loan made to you. Most often, that
something is your home, which is why they're also commonly called home
loans and homeowner loans. In some cases, the collateral put up for
secured loans may be something other than your house - your car, a boat
or something else of value, but most often, secured loans are guaranteed
by your house.
Secured loans offer the lender a guarantee of repayment. If you
don't or can't repay the money that you borrowed, they can go to court
and request that your house be sold so that they can recover their
money. Because of this guarantee, secured loans are considered less
risky by lenders, and that leads to some of the other differences
between secured loans and unsecured loans.
Secured loans often carry lower interest rates than unsecured
loans. Many lenders base the interest rate that they charge for making a
loan on the risk attached to making it. With your house securing the
loan, they face less risk of losing their money, and will have less
trouble collecting from you in the case that you default.
Lenders will make secured loans for greater amounts that unsecured
loans for the same reason. The larger the loan they make, the greater
the risk that the borrower will be unable to pay it back. When you
secure the loan with your home, you reduce the risk that you'll walk
away with their money and they're willing to lend more, often up to the
value of your equity in your home.
You can generally take out secured loans for longer terms than
unsecured loans. In most cases, the repayment for an unsecured loan is
less than five years. Most secured loans are repayable over the course
of five to ten years, and some may extend up to fifteen years.
Rachael Gallant has worked for the UK financial services
market for a number of years specialising in secured loan applications
for UK home owners. She understands how time consuming it can be trying
to interpret the associated jargon which is why she writes clear, easy
to understand guides exclusively for "Secured Loans Centre".
