In financial terms a loan is an advancing of funds by one or many people, institutions, companies, or other similar entities to others, companies etc. The recipient is then liable to pay interest on this debt as well as just to repay the original principal sum borrowed and eventually to settle the debt. Most loans are secured in nature, meaning that the loan-receiver promises to return the funds, in the event of non-repayment. In other words, he or she must be able to demonstrate the ability to repay. However, one of the most popular and useful types of loans available today are unsecured loans.
Unsecured loans are not collateralized like secured loans. As a result, they are normally issued without any collateral or guarantee. This allows the loan principal to be spread out over a large number of different recipients (usually from hundreds to thousands), each paying a different and calculated rate of interest (plus interest depending upon the lender’s policy), and with time, so as to ensure that the loan principal is spread out enough for everyone to receive what they are due. It also allows the lender to take control of the repayment terms to ensure that people continue to pay the loan principal.
Since there is no collateral, the lender’s concern is its ability to recover its funds in case of default on the loan. This is why lenders often offer long repayment terms – in other words, long enough to keep the borrower in default so that the lender can make its recovery. It is also common for the lender to impose reasonable interest rates on unsecured loans. This again ensures that the lender is able to recover its funds even if people stop repaying. This can only mean one thing – that borrowers have little to lose by opting for unsecured loans over secured loans.
Unsecured car loans are easier to obtain because, unlike secured loans, there is no need for any collateral to back up the loan amount. All that the borrower needs to provide is proof of ownership of the car – usually a copy of the car’s vehicle registration certificate. Although unsecured car loans are easier to obtain, this is not to mean that they are easier to repay. Repayment terms can be quite difficult – often requiring multiple monthly payments that go towards repayment of principal and interest, with very little flexibility. This is in contrast to a secured loan where the loan-to-value ratio is already calculated and the borrower only needs to provide collateral for the loan.
Another major difference between an unsecured loan and a secured loan is that the borrower is able to borrow more money than the lender. With an unsecured loan, the borrower has to calculate how much they can borrow first, and then how much the monthly repayments will be. Once this is calculated, they then have to factor in their ability to borrow further and their credit rating. In essence, then, the more the loan is borrowed, the higher the monthly repayments will be. However, the good news is that this interest rate can be lowered if the borrowers have good credit. As well as this, they can sometimes choose an interest rate which is below the rate offered by the lenders to their secured customers.
Many people want to take out a personal loan, but do not know what their options are when it comes to borrowing money. There are many different types of loans available in the market and financial institutions, both online and in bricks and mortar stores, offer various types of loans. It is therefore, important that the borrower does their research properly in order to ensure that they choose the best option available. Most financial institutions will provide a online application facility so that individuals can apply from anywhere at any time. Individuals can also speak to friends and family for more information before making up their minds about which loan to take out.