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What makes it
more difficult to decide upon the finance option is that both secured and
unsecured loans have a conflicting set of features, and the disadvantages of
one are countered by the other.
Secured loans vs. Unsecured loans
Secured loans are the most conventional method of financing large sums of
money. Even in older times people used to take loans to use in agriculture or
other such needs by keeping their lands as security. Unsecured loans, on the
other hand are of a recent origin. Since secured loans required the borrower
to keep his home as collateral, many people who were without homes or who did
not prefer attaching homes to obligations were left without finance. This
also hampered the lending business of the lenders because the group was
sizable. Thus, unsecured loans were launched as an alternative to the secured
Misconceptions on Secured loans
There are many a myths doing rounds that have led to a sagging popularity
of secured loans. People believe that by offering home as collateral they
will have to move home until they repay the amount lent. People only transfer
the ownership rights and not the right to live in the home. The lender can
lay claim to the home only when the borrower does not repay the loan in
This will particularly interest the homeowners who do not take secured loans to protect their homes. Another important point that these people need to keep in mind is that they cannot escape the lender even on taking an unsecured loan. Though these loans are offered without any backing, the lender finds ways through which to recover the amount remaining on the unsecured loans.
This will shift a major part of the clientele for unsecured loans that comprises of the homeowners. However, unsecured loans continue to be the lifeline for the tenants. This is in spite of the fact that unsecured loans are more costly than the secured loans. The rate of interest charged from the unsecured loan customers is higher because of the larger risk involved.
One often gets to hear about credit history in the financial circles.
Credit history is a record of the conduct of an individual in terms of the
credit behaviour. Any failure by an individual on any debts, loans, or
mortgages is immediately recorded in the credit file. Though lenders prefer
the borrower to have a good credit history, they do not attach a special
importance to it if the borrower is offering collateral. Home can back the
loan if the borrower refuses to. The backing however is absent in an
unsecured loan. This is why lenders demand a good credit history when
offering an unsecured loan. Lenders who accept to offer unsecured loans with
bad credit try to compensate the risk with a still higher interest rate.
Terms differ with a secured loan
With a secured loan, you can in fact enjoy more favourable terms than the unsecured loans. Apart from the low interest rate, there are many more features exclusively for the borrowers of secured loans. Some lenders allow the borrowers to extend the period of repayment of the secured loans as much as they desire. Typical repayment period extends between 5-40 years. Extending the term of repayment however, increases the interest that a borrower will have to pay. Borrowers can discuss with experts about the optimum term that will lessen the interest cost without increasing the burden on the monthly income.
Whatever be the option chosen, adequate consideration must be given to the conditions under which the option is to work. A particular finance option that did wonders to your friends finances, need not necessarily work in the same manner in your case. Instead of improving the situation, they sometimes back fire with serious consequences for the finances. Taking second opinion is always beneficial since it helps to test the validity of the advice offered by your lender.