A guide to secured and unsecured loans

When your finances aren't sufficient to fund your desires, the need to borrow arises. Incurring debts is far easier than paying them. So, before availing loans, one should always ask himself/herself "Do I really require a loan?" If you answer in negative to this question, don't mistake taking a loan and getting an unnecessary burden on your soul.

Loans are definitely the viable ways to make the life a bit more comfortable by killing the paucity of funds. But, impulsive decisions can cause real problems for the borrowers. Loans, whether secured or unsecured loans, can actually let you fall in a vicious circle whereby instead of solving your financial problems, you end up increasing them.

The decisions weather you need to procure an unsecured loan or a secured loan not is a crucial one. Though the immediate monetary requirement may not be giving you time to think about these things, it's always advisable to analyze logically before taking a loan, lest you should repent later.

Many a times, it has been observed that borrowers in UK borrow more than they actually need to meet their monetary requirements. This temptation to borrow more because the lender is granting doesn't work well for the borrowers because they are unable to keep up with the monthly installments and this calls for bad debts. This is usually seen in case of secured loans when the borrower's home equity lures him to borrow more than he requires.

In adverse situations, when the borrowers' defaults on the loan keep on mounting, it may call for any of the following situations. This may happen in the case of secured as well as unsecured loans.

County Court Judgments (CCJ)- A CCJ is the successful result of a civil action brought by a creditor, in a County Court, against a debtor. This happens when the borrower defaults on the loan repayments. The court sends the borrower a 'Claim Form' showing how much the borrower owes to the creditor.

The 'Claim Form' is accompanied by an 'Admission Form', asking the borrower about his income and outgoings. If the borrower doesn't reply to the court within 16 days, the court may order him to pay either the full or partial amount he owes to the lender.

If the borrower pays the amount (asked by the court) in the ordered time, a CCJ will be recorded against him on the Register of Country Court Judgments for the next six years. This may prevent the borrower from getting secured and unsecured loans further as lending institutions such as banks, building societies and loan companies use the registered information to decide whether to grant credit or loans to a particular customer or not.

Individual Voluntary Arrangements (IVAs)- This happens when the borrower himself tells the lender that he can not make the loan repayment in totality. The borrower offers a certain amount that he can repay and with the mutual discretion between the lender and borrower, an agreement is signed.

In case, the borrower owes money to multiple lenders, the creditors have to agree on the Arrangement through a vote system and decide what exact amount the borrower will be paying to each of the lender. If the borrower still doesn't make the payments as in accordance the IVA, the Arrangement will fail and the creditors will be able to take other legal action against you. It may also result in bankruptcy.

Bankruptcy- To define, Bankruptcy is a legally declared inability or impairment of ability of an individual or organization to pay their creditors. A declared state of bankruptcy can be requested or initiated by the bankrupt individual himself, or it can be requested by lenders in an effort to recover a portion of what they are owed.

However, in majority of cases, the bankruptcy is initiated by the "bankrupt" individual himself. Thereby, he declares himself as an insolvent. Bankruptcy normally lasts for a year. After this, the borrower is discharged of from his 'bankruptcy' status, regardless how much he still owes to his creditors.

So, whenever you procure secured loans or unsecured loans, make a point to be regular with the repayments. Otherwise any of the above stated situations may arise. It's very easy to avail money through loans and gratify your current financial needs. But, one should always keep in mind that debts are incurred to repay.

The lender has not opened a charity and thus, wants his money back. If the borrower doesn't repay on his own, the lender will be forced to resort to other things.

Following are some of the points one should keep in mind before taking loan:-.

1. Get the background info- The foremost thing is to decide whether you want to avail an unsecured loan or a secured loan. Secured loans require the borrower to pledge any of his fixed assets like home as collateral. Though these loans attract low interest rates, the lender can repossess the home at stake, if the borrower defaults on the loan repayment. If you don't want to risk your home for a loan, apply for unsecured loans.
   
   Unsecured loans don't demand you to put any of your assets as security. These loans are helpful to non-homeowners like tenants and students. Even those you don't have enough equity in their house can go for unsecured loans. The lender compensates the risk involved in the unsecured loan deal by charging a high rate of interest. But if you have an excellent credit record, the lender may give you lucrative APR.


2. Shop around in the market- Don't hurry while making loan decisions. Shop extensively in the loan market and compare loans. Surf the internet and don't always rely on the high-street banks. Nowadays, private and online lenders offer attractive deals on both the secured and the unsecured loans. Compare varied loan quotes on the basis of the APR, loan amount, loan tenure, additional charges and schemes offered by different lenders.



3. Read the loan agreement carefully- Once you have decided in favor of a particular loan deal, read the agreement letter produced by the lender carefully. Ask for the true cost of the loan. This will include the nominal rate offered by the lender + the annual charges and arrangement charges (if any). Don't rely on the word of mouth. Always ask the lender for each clause or offer to be formally written.



4. Be realistic- Never borrow more than what you require. You may be eligible for a greater amount than you need but then you may not be able to afford the monthly installments. This may call for bad debts. If you can afford to pay back the loan in a short tenure, do so. This way, you'll pay less interest on you loan. If you need hefty amounts, apply for secured loans.

So, availing loans is a great decision and you should think logically and strategically before finalising any secured or unsecured loan deal.