Types of Loans
Secured Loans
A secured loan is a loan in which the borrower pledges some asset traditionally a property as collateral for the loan.
A mortgage loan is a very common type of secured loan, used by many individuals to purchase housing. In this arrangement, the money is used to purchase the property. The financial institution, however, is given security — a lien on the title to the house — until the mortgage is paid off in full. If the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it, to recover sums owing to it.
In some instances, another secured loan known as a second charge secured loan is taken out to consolidate other debts such as higher interest loans, credit and store cards, to purchase a new or used car, carry out home improvements, pay for a holiday, wedding or even school fees. This loan works in much the same way as a mortgage is secured by housing. The duration of the loan period can be from 5 years to 25 years.
Purpose
There are two purposes for a loan secured by debt. In the first purpose, by extending the loan through securing the debt, the creditor is relieved of most of the financial risks involved because it allows the creditor to take the property in the event that the debt is not properly repaid. In exchange, this permits the second purpose where the debtors may receive loans on more favorable terms than that available for unsecured debt, or to be extended credit under circumstances when credit under terms of unsecured debt would not be extended at all. The creditor may offer a loan with attractive interest rates and repayment periods for the secured debt.
Unsecured Loans
Unsecured loans are monetary loans that are not secured against the borrowers assets. These may be available from financial institutions under many different guises or marketing packages:
Credit card debt, personal loans, bank overdrafts, credit facilities or lines of credit.
The interest rates applicable to these different forms may vary depending on the lender and the borrower.
These may or may not be regulated by law. In the United Kingdom, when applied to individuals, these may come under the Consumer Credit Act 1974.