Whether you want to fund your business or just take out a loan for an unexpected expense, you might be wondering what the best loan you should take out is. The truth is that there are many different types of loans and the terms can vary depending on their purpose. You need to find out which type of loan will best suit your needs.
There are two main types of loans that you can apply for: secured loans and unsecured loans. There are pros and cons to both, but it’s vital you take a closer look before choosing which one is right for your business.
What is a secured loan?
Secured personal loans are secured against your eligible personal assets, such as a house or car. If you can’t pay your monthly fee and the value of your asset falls below the amount of your loan, the lender may sell your asset to raise funds to cover the outstanding balance. Also, if you apply for a secured loan, the application process could take longer than other types of loans.
If you’re thinking about taking out a secured personal loan, there are some things that you’ll need to provide with your application. Some common examples are payslips, proof of employment, proof you’ve paid utility bills and proof you’ve been able to pay off other debts like a credit card. These will provide your lender with a level of comfort that you’re a suitable candidate for a loan. The lender may also require specific details such as the value of your personal asset. Most personal lenders would require the value of the asset to be at least equal to the amount of your loan
What are the pros and cons of a secured loan?
Secured loans are great for people who are looking to borrow money and keep it in the form of a secured asset. The general appeal of a secured loan is that it can allow you to establish and maintain lower interest rates than an unsecured loan, which means that you will be able to afford more expensive items or services.
If you are interested in securing a new car, for example, it might be possible to get a car loan with lower interest rates than what you would get on an unsecured loan. This means that you could afford a new car even if you have poor credit or no credit at all.
However, the downside of this kind of loan is that if you default on the loan you risk losing your asset, depending on what was used to cover the loan in the first place. In the case of a car loan, if you are unable to service the loan, you could lose your car.
What is an unsecured loan?
Unsecured personal loans are the most common type of loan taken by customers. They are not backed by any collateral, so lenders can charge higher yearly interest rates. However, they are considered a riskier loan option because it’s not as secure as other types of loans: if you default on your payments or cannot make them at all, you could lose your home or car.
What are the pros and cons of an unsecured loan?
Unsecured loans are the most common type of loans available to you, and it’s easy to see why: they don’t require any collateral and they tend to carry lower interest rates than secured loans do.
There are, however, some drawbacks that come with taking on an unsecured loan. For one thing, you will be charged interest from the outset; this is considered an added cost to your borrowing. Also, if you have bad credit or no credit score at all, then it might be harder for you to qualify for an unsecured loan in the first place. These types of loans also tend to have shorter loan repayment terms than their secured loans, so if you’re planning on consolidating debt or making other payments on time over a long period of time, then an unsecured loan may not be for you.
What are the different types of unsecured loans?
There are many types of unsecured loans that you can use for a wide range of purposes. The most typical forms of unsecured loans are as follows:
- Unsecured personal loans. Personal loans are the most common type of unsecured loan. This type of loan is typically used for a variety of other purposes, including everything from unexpected medical bills to home improvement projects and travel. Just check with your lender to make sure your intended use is permitted before getting a personal loan.
- Personal lines of credit. Personal lines of credit are lines of credit that you can use to borrow up to a set amount of money for a given amount of time. They’re similar to credit cards, but they’re available only to your personal accounts. You can use the total approved funds during your draw period as you borrow and repay. They are offered through banks and credit unions, and the amount you can borrow is determined by your income and assets.
- Unsecured credit cards. Credit cards are loans that give you access to a certain amount of spending power. You pay the credit card company back by paying off your balance each month. While secured credit cards are available, most consumer cards do not require collateral.
- Student loans. When you take out a student loan, you are borrowing money to pay for higher education. The type of loan you choose will be based on your financial situation and ability to repay the loan. The most common types of student loans include government-backed loans and private student loans. Government-backed loans are unsecured and usually have lower interest rates than private loans, but they can have higher fees and early repayment penalties. Private student loans are backed by private lenders, which means that their interest rates tend to be higher than government-backed loans.
Which is the better option, an unsecured loan or a secured loan?
If you have a good credit history, a decent income, and don’t need large sums of money then an unsecured loan is likely the best product for you. But if your credit rating is not so good, or if you need a large amount of money then you are going to struggle to find a lender willing to provide an unsecured loan and so, you might want to consider looking into secured loans instead.
The bottom line is that both secured and unsecured loans offer a valuable solution to individuals in need of financial assistance and they can be used to afford some much-needed purchases or allow you to settle a particular debt. However, the most important thing is that you know your full financial picture before making any loan decision. You need to know about the interest rates, terms and conditions of your loan as well as whether or not it will impact your credit score so that you make an informed choice with your finances in mind.