Generally speaking, there are two main categories of loans: unsecured and secured loans. This is what you need to know about each.
1. What is an unsecured loan?
An unsecured loan agreement is one where you don’t need to put forward any collateral. Collateral is an asset that has a financial value, such as a house, deeds to a car, or another object that has a defined, objective value that is deemed by the lender to be sufficient. With an unsecured loan agreement, this collateral is not required and you don’t put your house, or another asset, at risk.
Unsecured loans tend to be of lower value, such as personal loans. However, although they are unsecured, they are still legal contracts, and if you don’t repay your loan according to the agreement you signed, legal action can be taken against you.
2. What is a secured loan?
A secured loan is, by contrast, secured by an asset known as collateral. These types of loans tend to be for higher value sums and the loan agreement will usually be written by a legal expert such as Parachute Law.
A secured loan is very often secured by a home, and then it has a particular name – a mortgage. Other types of secured loans include car loans, where the car is the underlying asset (or rather, the car log book which denotes ownership)
Both loans share features in that they are widely available, offered depending on your credit rating, and require repayment – usually in stages – with interest. The full details of the loan must be defined, usually in writing, although there are conditions in which a verbal agreement will be sufficient.
Is a loan right for you?
Ultimately, the question of whether a loan is right for you, and which loan type might be best, is highly individual. But it’s important to assess very carefully your ability to repay the loan in full, on time and with interest. Otherwise, you could find yourself taken to court and your credit rating will be damaged.
