What is the difference between secured and unsecured loan?

Secured and Unsecured Loans
Any loan in which the debtor pledges an asset or a property to the creditor as collateral for loan is termed a secured loan. This ensures that in cases where the debtor defaults the creditor takes over the property and can sell the whole or a part of the property to gain the amount he has lent. In cases where the sale of debt is not enough to pay the debt amount, the creditor seeks the court and can obtain a deficiency judgement for payment of the rest of the debt amount. In secured debts the debt is secured by means of the collateral. Examples of secured loans are home loans, mortgage loans, etc.

The name unsecured loan itself states that this is the opposite of secured loans. In these types of loans, the loan amount is not linked to any asset or property and the creditor can only demand the debt through the borrower and not through his assets. In cases of liquidation or bankruptcy, the unsecured loan creditors can raise a claim on the borrower’s assets though it is usually a small proportion as compared to the secured creditors which is realized. These factors make both the loan and the creditor unsecure. In case the debtor defaults, the creditor can charge additional charges towards non-payment of loan according to the debt terms and conditions, but cannot demand any claim on the debtor’s assets or properties. Most of the times, these loans are opted by bankrupt individuals to pay off other loans that are out of bankruptcy write-off like court fines, education loan, etc. Examples of such loans include personal loans and credit card loans.

Purpose
There are many reasons why a loan is secured by means of a collateral. There are two major reasons which benefit both the creditor and the debtor. There might be cases that the debtor is not able to pay off the loan and at these situations, the creditor can obtain his amount back by means of the security and hence he is relieved from any possible financial losses. This reason not only helps the creditor but also benefits the debtor as he receives the debt in terms that are favourable for him. Sometimes the debtor might also be allowed to extend the credit levels based on the asset that has been secured. Secured loan helps acquire loans that are offered in attractive rates of interest and with flexible period of repayment as compared to unsecured debts.

Unsecured loans also have their own purposes in spite of the lack of security in the loan. In some cases you would need to go in for loans that are temporary and urgent. The loan especially plays an important part in repayment of loans during bankruptcy. There might be cases of loans that are not included in your bankruptcy which you would need to repay during the period. Such loan cannot be paid by your assets as they would have been seized by the court and also secured debts depends on your credit rating and bankruptcy pulls it down drastically. In such situations, Unsecured loans can be taken that would help resolve credit problems during bankruptcy. Though you can avail such loans, there does exist a certain range of £1000 -£25000 within which you can borrow. The unsecured loans are processed after verification of your monthly income and repayments statements. The disadvantage of unsecured loans is the high interest rates and repayment periods for the loan. If the borrower declares bankruptcy, then the unsecured debts are paid after paying the secured debts and this is one reason why the interest rates are high.

Though unsecured loans help during timely needs, it might sometimes pose a risk due to the high rate of interest and shot repayment periods. Thus it is always wise to look around and plan before you take an unsecured debt. A little bit of analysis can help you find the least possible rates and convenient repayment options. You also should plan your monthly repayment amount and decide on the loan amount. This is a very important step in cases where you are taking up a loan during bankruptcy to close you other loans. Most of the time, people opt for unsecured loans due to the low credit history and prompt repayment at frequent intervals for your unsecured debt can help increase your credit levels to the next step.

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