In the world of loans there are really just two basic types, secured and unsecured. Secured loans are less of a risk to the lender as the borrower needs to put up collateral to obtain the loan, which is then at risk if financial difficulties are encountered. A mortgage loan is the most typical example of a secured loan, with the property borrowed against being the actual collateral. Thus if the borrower defaults against their mortgage loan their home is at risk. In the same way a vehicle can be used as collateral to obtain an auto loan.
Unsecured loans demand no such collateral so the borrower has less to lose. However because no collateral is put up to secure the loan then the costs of borrowing can be higher than with a secured loan. Secured loans are simply not viable for some people anyway, as they have nothing of value to offer as collateral. Typically a tenant has no property to offer, nor does a student, but this has an advantage as if the tenant then becomes a home owner, as he does not risk losing the primary asset of the property over an unsecured loan.
Unsecured loans can be obtained at good rates by those with a good credit rating, who prefer to use them rather than taking a secured loan out on their property, for such things as home improvements. Rates of interest vary on all loans depending on a person’s credit worthiness, so an astute homeowner with an excellent credit score may feel more secure obtaining an unsecured loan than one held against the property, yet may still be able to obtain a good interest rate.
Unsecured loans can be obtained for a variety of reasons, such as to pay for a vacation or to pay for a high ticket item. It can work out as the less expensive option over financing through a credit card if it is necessary to repay the amount used over a set period of time. It is possible to get the repayment terms of a loan fixed whilst the terms of interest on a credit card will be variable, leaving the borrower exposed to higher repayments than originally anticipated if interest rates rise. However a lot of unsecured loans do carry an early redemption penalty so always check if this is applicable in case you wish to repay the loan early.
Unsecured loans can be obtained to consolidate other debts, and this can be advantageous if it cuts the cost of overall monthly repayments to your creditors. Instead of paying out a monthly amount to several creditors an unsecured loan means that all the creditors can be paid off at once and then just one monthly payment made towards the unsecured loan. This can be an excellent way of bringing finances under control when it looks as though the individual payments are getting out of control. Having just one repayment at one set rate can be much easier to manage.
Unsecured loans can certainly have advantages over using credit cards, and although late payments will be subject to the same consequences as late payments on other types of borrowing, at least the fear is not there that a prized asset can be lost if it is placed as collateral.