Unsecured Loans

There’s optimism in borrowing money, when you take out an loan you are stating to yourself and to the world that you are confident that your situation is about to change for the better. What you cannot afford now, you will be able to afford in the near future. It is for this reason you are able to take a loan and rely heavily on the fact that your income will be able to keep sustaining you whilst covering the cost of the loan.

Secured Loans

Sometimes the people lending the money need a bit more to rely on than your confidence alone, this is where secured loans come in. Secured loans are loans that are designed for homeowners. When the lenders lend the money they are tying it to the home, if the borrower is unable to pay back the loan, the lenders will claim their money through their home. If the borrowers are able to pay the money back in full and on time, they continue to be the owners of their own home.

Secured loans are likely to be bigger and come with lower interest rates but they certainly do come with a obvious risks to your property and therefore to your financial security. In order to receive this loan, borrowers are putting a lot on the line.

Unsecured Loans

Unsecured loans, however, are attractive to both homeowners and non-homeowners (or tenants) alike. Statistics actually show that an equal number of home owners and tenants opt for unsecured loans because of it’s benefits. Loans such as these typically provide smaller amounts of cash with shorter processing time and higher interest rates designed to help people out of a sticky financial situation as quickly as possible. These loans have nothing to do with residential status, rather the loan provided is calculated based on your monthly income and on your predicted ability to pay back the loan in full and on time.

This is basically your Debt To Income ratio (DTI). DTI is built up by your total monthly income divided by your total monthly loan repayments. A DTI of 20% is considered a very good DTI ratio. It is important that you keep your DTI promising for your credit card score and in order to establish yourself as an attractive candidate for an unsecured loan or secured loan.

The downside of unsecured loan may be obvious; although you are not risking your property and home, if you are late paying your repayments (as research show an increasing number of borrowers are) interest rates start to climb, credit card scores begin to plummet and in extreme cases legal action can be taken against the borrower. It is therefore of the utmost importance to make a well informed estimation regarding the loan that you are most confident you will be able to pay back comfortably, without stretching any existing resources.