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Secured loans vs. unsecured loans

Secured loans

Whether it is a mortgage of significant value to cover the purchase of a property or a small personal loan to finance a holiday, car purchase or even an unforeseen emergency, loans are there as a solution for a wide range of different money problems.

Although there are many different types of loans to suit the different financial circumstances that borrowers will find themselves in, essentially there are two main types of borrowing.

Secured loans

Taking out a secured loan means that you are basically borrowing against the value of an asset that you own. In the most common type of example, a mortgage is a secured loan because it relates to a property.

A secured loan gives the lender a legal ‘charge’ against the asset that the money is borrowed against, so in the case of a house or flat if you fail to make the repayments and clear the mortgage loan the lender can reclaim the amount outstanding from the property itself.

In a worst case scenario this can mean that you are evicted from the property, it is repossessed by the bank or building society and sold to repay the debt. Sometimes the value of the property is sold for might even be less that the amount outstanding and the borrower can lose their home and still be in debt for many thousands of pounds.

Unsecured loans

An unsecured loan doesn’t have any asset attached to it. These types of loans are given by making an assessment on your ability to repay and are usually called personal loans.

Although you will always need to prove your ability to repay any type of loan before you are accepted by a lender, there are plenty of deals offering unsecured loans for bad credit and others that even take income from benefits into account.

Of course an unsecured loan still needs to be cleared and if you fail to do so you run the risk of court action as well as long lasting damage to your credit rating.

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