For someone entering the loan market for the first time, the differences between different sorts of loan arrangements can appear complicated. However, in many cases, there are simple differences that can be easily explained. For example, one type of loan arrangement is an unsecured loan, and there are a number of ways in which an unsecured loan is different from other loans.
Principle differences between secured and unsecured loans
The main characteristic that makes an unsecured loan different from other sorts of loan is that there is no risk placed on, for example, property belonging to the borrower. In a secured loan, property may be used to guarantee repayments, and the loan provider may repossess this if loan repayments are not made. However, in an unsecured loan, this security, or collateral, is not part of the arrangement, and so cannot be repossessed by the loan provider within the terms of the loan agreement.
Advantages and disadvantages of unsecured loans
The fact that there is no security involved in negotiating an unsecured loan makes this type of loan advantageous to, for example, someone who does not own their own home. Even without this security, an unsecured loan still provides the means to get access to cash when it is required for a large purchase. On the other hand, the absence of security in the loan arrangement also means that the interest rates within an unsecured loan may be a little higher. Other fees, such as those charged for late payments, may also be higher for an unsecured loan. This is to offset the increased risk to the loan provider that is inherent within an unsecured loan.
The most appropriate loans for different needs
Each loan is different; depending on the reason for the loan being taken out, the size of the loan in question, the financial situation of the loan applicant, and the wider context of the market situation and financial outlook in general. For this reason, there is no single guideline that can be used to say that one sort of loan is always better for one sort of purchase. A small-scale loan for a one-off purchase may be better as an unsecured loan if the loan applicant has a good chance of being able to pay it off quickly, as this may qualify for better terms. However, the overall situation should be assessed before deciding on the most appropriate
Other loan options
Even if an unsecured loan is not available in a given situation, other loan types may also be available. As well as secured loans, which are taken out against collateral such as property owned by the loan applicant, guarantor loans may also be used. These loans involve a third party in providing collateral as security for the loan, so that a loan applicant with no property and no credit history can still find that it is possible to get a loan. Other options include payday loans, taken out against a forthcoming salary payment, or one of a variety of personal loans for specific situations.