Secured loans and unsecured loans

Although there are too many different ways for borrowing money, when it comes to getting that money from a bank, building societies, or a private lender, there are basically two types of loans to choose from secured loans and unsecured loans. The Financial Services Authority (FSA) advises that before anyone applies for a loan, people should make sure that they would be able to repay such loan in the future.

In fact, the FSA provides an interactive test online to help you determine if you are a good candidate to borrow money and the potential problems that you may face after you are approved. Follow this link if you want to take such test: www.moneymadeclear.fsa.gov.uk/tools/debt_test.html Then, if you believe that you can face the challenge, make sure to understand the differences between secured and unsecured loans.

Secured loans are granted by a lender with the implicit right that you give, enabling such lender to force the sale of collateral or an asset against which the loan is secured, in case you fail to keep up with your repayments. The most popular form of a secure loan is the so-called “further advance’”, which is the type of loan in which the money you are receiving is secured against your home, borrowing extra on your mortgage.

Mortgages are also secured loans, but differentiate from other type of loans not only because they are related to the purchase of a property, but also because of the different terms, periods of time, and interest rates for repayment. On the other hand, unsecured loans do not require collateral or any other guarantee, except the promise of the borrower to repay his or her debt. Because transactions rely on the given word of honor, lenders are at a bigger risk than they are with secured loans, thus the need to apply higher interests to the money lent.

While secured loans are more likely solutions for people who require a large amount of money over a longer term for home improvement or costly needs. Unsecured loans are better for small amounts of money that can be paid in a shorter period of time, avoiding accruing excessive interest rates. While secured loans are more often regulated for fixed terms and interest rates you can deal with your lender for adjustments over time. Unsecured loans are not as flexible, being lenders who setup payments, interest rates, penalties and other details for the repayment of the loan.

Other forms of borrowing money include buying on credit, overdrafts and Credit Union loans, endorsed by mutual financial organisations owned and ran from members to members. However, your best option is a secured loan for cheaper money borrowing or an unsecured loan for short-term lending, ranging from one to up to five years. Like occurs with all the financial matters, a careful research on the different loan offers available and the conditions associated to each of them will help you to make the right decision, whether you pass or not the FSA interactive test.

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