What is the difference between secured and unsecured loan in UK’s financial market?
Which loan is right for you?
If you are looking forward to raise funds through a loan, then you might be forgiven for being confused about which route to go down and to get the right one (loan) in order to meet your requirements. Well, you need not worry anymore as in this post you will get the difference between secured and unsecured loans in UK’s financial market.
Before explaining the difference between unsecured and secured loans it is important to note that they are actually the different beasts and one should always know the difference between them before making any application.
One of the simple ways to differentiate between loans for any finance products is to check that whether lending is secured or not.
What is an unsecured loan?
Not only in the UK but also in other regions of the world, unsecured loans are available to everyone if the person is having a fair credit score. In order to apply for the same a person doesn’t have to be a homeowner.
Unsecured loans are mostly offered by the lenders, banks, peer-to-peer companies and in most of the cases, they are not backed by any asset. Unsecured loans always suggest that there is a higher risk for the lender as they are having no guarantee of getting their capital back, so the applicants have to pay more interest.
It is also evident that this kind of loans usually tends to be for small amounts and they also take place over a short span of time. Unsecured loans, also known as unsecured business loans are generally backed by industry’s trading position.
It is very common for the lenders to specify the amount of the loan as multiple of their earnings. In this way, they can also make a rough estimate on the future prospect of their business.
Let’s quote an example-
Suppose a person in the UK borrows £5,000 over 5 years given at a rate of 14% with fixed APRC. Then the person has to pay £116.26 every month in 60 installments and the total money payable is around £6975.6. The figure includes net loan, interest of £1975.60, lender and broker fee, etc.
What is a secured loan?
A secured loan, also known as homeowner loan, is actually a credit contract which is backed using the equity in a property which is held by the debtor. This kind of loans is only available to them who are having their own property or homes in the UK and they can borrow between £5,000 to £125,000.
But there care certain that have to be kept in mind, like, the amount borrowed, along with its rate of interest and term depends on the settings and the amount of equity the person is having on his property.
Secured business loans also allow the person to borrow at low interest rate against the property raised and it hardly matters even if the debtor is having bad credit history.
Pros and cons of unsecured loans
- Convenient way to avail the cash you need
- Comes with flexible repaying terms
- Borrowers have to pay high rate of interest
Pros and cons of secured loans
- Offers fixed monthly payment mode
- One can get loan of higher amount
- Repayment failure may result in loss of your home or property
- Might also have to pay penalties in case of failure in the repayment of loan