Unsecured Loans: Route To Finance In The Absence Of Guarantee

 Does yours being a tenant or a homeowner with insufficient equity imply that loans and other methods of financing cash-shortages are not meant for you. Loan providers do not reveal such stark indifferences towards borrowers who come for unsecured loans. However, the terms on which unsecured loans are offered clearly show the apathy on the part of loan providers.

Unsecured loans are personal loans where lender lends money without any direct stake on any asset of the borrower. This is the peculiarity of unsecured loans. It was this feature of unsecured loans, i.e. not having any direct stake, that was preferred most by borrowers. When seen in comparison to secured loans, the unsecured loans appeared a much better method of drawing finance because the borrowers’ assets were safe in this arrangement.

When unsecured loan does not consume the equity in home, the equity can be utilised for getting finance through other loans.

The safety of home or any collateral pledged under a loan is so prominent that borrowers would prefer to pay a higher rate of interest on an unsecured loan. Since there is no collateral to back the repayments of unsecured loan, the risk involved is much higher. The loan providers charge a higher rate of interest in order to compensate for the risk. The interest rate corresponding to the cost of inflation is more or less similar to the secured loans.

However, interest rates chargeable on unsecured loans are well defined by principal banks and financial institutions. Loan providers who are charging more than this rate without any justifiable reason are only overcharging borrowers.

Unsecured loans are offered against the faith induced by the borrowers through their credit report. Credit report is a list prepared by two of the most important credit reference agencies in the UK (Experian and Equifax) of all credit transactions entered into by every customer. Thus, even small debts on which payment has not been made after due date and where the creditor has complained about this to the County Courts, the borrower will have a bad remark on his credit file. A large number of defaults, County Court judgements, Individual Voluntary Arrangements, etc. will be considered as a lack of reliability. Getting unsecured loans will be a little difficult for these borrowers.

The major customer group of unsecured loans comes from the tenants and the other homeless people. Homeowners too have begun using unsecured loans in order to save them from a direct claim on home. Unemployed people constitute another big group of users of unsecured loans in the UK.

Apart from interest rates and certain other terms like the making of collateral superfluous, unsecured loans are very similar to secured loans. The methods that are available for repayment of unsecured loans are similar to secured loans. The amount to be repaid will include the actual loan amount, interest for the period, and any other fees charged by the borrower. Borrower will decide how he wants to repay the whole of the amount. Paying the entire amount within a small time will save on interest cost. However, it will be difficult to arrange the amount immediately. Another method will be to pay the loan through monthly instalments. For this method, the total repayable amount is divided into the various months that constitute the term of repayment. A slight modification of the above method is where only interest is required to be paid by the borrower. The borrower pays the balance of the loan at the end of the term.

Borrowers who want to have a faster sanction of the loan amount will find unsecured loans more beneficial. Since, no collateral is required to be offered in unsecured loans, the step involving valuation of the asset can be safely eliminated, thus accelerating the pace of approval.

An unsecured loan does not guarantee that assets, and more specifically home, will be spared the consequences of non-payment of the amount due to the loan providers. The only difference in case of unsecured loans is that loan providers will not be able to directly stake a claim for liquidation of any asset. The loan provider will have to adopt the litigation route to recover the unpaid amount. This method can be expensive and time consuming. In cases of bankruptcy, unsecured loans are repaid only after all the secured loans have been repaid.

Taking informed decisions with proper guidance from experts will ensure that unsecured loans do not become troublesome in the long run. There are many loan providers and independent financial advisors who will consider the case of borrowers properly and thus recommend proper unsecured loans.

 Peter Taylor

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