How do unsecured and secured loans work? Are payday loans secured or ? Read our post to find out which sort of loan is the best loan for you!
- What are secured loans?
- Unsecured loans – what you should know:
- What is an instalment loan?
- Why might you fall behind on your payments?
- What are the consequences of non-payment?
- Secured loans vs unsecured loans – what are the advantages and disadvantages?
- Why a person might have difficulty repaying loans
- Consequences of non payments
This article will explain how cheap payday loans, secured loans and unsecured loans work? In today’s day and age, there are hundreds of companies offering you different types of loans. Sometimes, it can be obvious which type of loan is the most suitable to your needs. For example, you normally take out a mortgage to buy a house. However, sometimes, the options are just overwhelming!
For example, you need to cover an urgent car repair, which will cost you £400. Should you borrow £400 and pay it back on your next payday? Alternatively, you could opt for a loan that is to be repaid over 3 months? Maybe the best thing to do is borrow £200 from two different companies. Perhaps a secured loan is good. Or how about short term loans UK? Perhaps you shouldn’t borrow at all, but just save up and travel by public transport instead! Obviously, saving up would be like jumping from the frying pan and into the fire. By the time you have saved up enough, you’ve burnt an extra load of cash on travel expenses! Let us examine different types of loans in order to understand this better. All types of loans fall under two categories:
Secured credit means you pledge an asset as collateral. The creditor can confiscate the asset should the customer default on the agreement. This type of credit is generally obtained over a longer period.
The most common type of secured loans is a mortgage, which is a type of instalment loan. An institution gives you a large amount of money to buy a house, and you need to repay them in monthly instalments until you clear the debt. This loan typically spans over 10 to 50 years. Should you fall behind on payments, the mortgage-provider reserves the legal right to confiscate the house and sell it to recover the debt owed. This type of instalment loan is now considered the normal way to buy a house.
A type of secured lending that frequents most local high streets is pawn broking. Pawnbrokers allow the customer to hand over a valuable of their choice. The broker will then give them a sum of money close to the value of the item. Once the customer has enough money to repay the broker, they will receive the valuable item back. Obviously, if the plan fails, the broker gets to keep the valuable item to compensate for the lost money.
Unsecured loans are money loans that have no collateral assigned to the borrower’s assets. Some types of unsecured borrowing include credit cards, personal loans, bank overdrafts, corporate bonds, subsidised loans, or peer-to-peer lending. Secured loans typically span over a shorter period.
In the United Kingdom, interest on all loans come under the Consumer Credit Act 1974, and are regulated by the FCA. Nevertheless, unsecured loans have a considerably higher rate of interest applied to them. This is because the lender is taking a bigger risk in lending to the customer. There is no guarantee that the customer will repay. In the case of default on an unsecured loan, the creditor will have to take the debtor to court, obtain a judgement against them, and then enforce it. Even this cannot assure the creditor that they will regain the money.
The most common type of unsecured borrowing is a bank overdraft. This is easy to set up and has very low interest rates. Personal loans also fall under this category, a type of which we will discuss in this article. Instalment loans are offered under both categories of secured loans and unsecured borrowing. Some instalment loans can last for years, such as a mortgage. In this article, however, we will focus more on personal loans that are repaid in instalments.
As the name suggests, an instalment loan is a loan that you borrow, but repay in instalments. This means that although you obtain a tidy sum at the start of the arrangement, you can repay the loan in bite size portions, making it easier for you to handle. You must be aware; however, that you will pay a little more interest. This is because you have the money for a longer amount of time.
The repayment amount is subject to the terms and conditions of the lender, and the additional costs vary widely. In order to accommodate the need to calculate monthly instalments on an instalment loan, online loan calculators can be found on various websites.
Who offers personal instalment loans?
Over the past year, with the introduction of the new FCA regulations, many companies have rebranded themselves as short term lenders offering short term loans, that are repaid in instalments, rather than payday lenders. This may have been the cause of the serious decline in the use of payday loans over the past 18 months. City Watchdog has been quoted saying that they have estimated only 3 or 4 payday lenders will eventually remain, compared to the 400 open now. This follows a crackdown on payday lenders in an attempt to protect the public, after many consumers struggled to deal with their sky high interest rates. In May 2015, a mum from Woolhope even pleaded guilty to stealing money from an employer, after she found herself struggling to keep up with repayments of payday loans.
The Telegraph already reported that one lender offering payday loans, The Money Shop, intends to start offering different prices and loan lengths to borrowers, subject to their credit and affordability assessments by the summer of 2015, and many companies are following suit.
Why should you get an instalment loan?
Rather than the old method of repaying the entire amount in one lump sum, an instalment loan is easier to pay off. Take the example given above: You can borrow £400 from a short term lender, then, instead of using half of your next salary to pay it off, you will need to repay it back in smaller amounts. So you get immediate gratification, as well as finding it easy to maintain your monthly payments – the best of both worlds.
Disadvantages of Instalment loans
The main advantage for the customer is ironically the main disadvantage for the lender. That is the period of the loan repayment. As the loan life extends, the risk heightens. You see, life has its way of taking on unexpected turns of event. This could be a break-up, causing the customer to lose their partner’s income; it could be a surprise redundancy. It could even be a natural disaster that will force them to spend a lot of money on recovery. The beauty of life is that it is unpredictable, but that can sometimes also be its biggest crime.
Luckily, these situations do not occur too often. Moreover, lenders have been clued in as to these types of sudden circumstances when training, so should be very understanding. Be aware, however, that most responsible payday loans direct lenders – such as Cashfloat – will ask for written proof of a big life changing event before freezing the interest on the account.
More disadvantages of instalment loans
However, every coin has a flipside. The main downside of instalment loans is that, despite the convenience, the interest paid is slightly higher (although not by much, thanks to new FCA caps in place).
Another disadvantage may be the constant weighing on your moral conscience, telling you that you owe someone money. No one likes to feel that they owe anyone anything, especially not money. There is no better feeling than being debt free! I mean, just think of the day you pay off your mortgage!
Working out the interest on an instalment loan
To be honest, there are so many different variations of instalment loans. They vary from many different amounts to multiple period choices. When researching for the correct lender for you, make sure that you are aware of the interest rate per month. Then, you can use an online loan calculator to work out your monthly repayments.
A hot topic on the news recently has been discussing how instalment loan providers were found to be adding hidden fees and charges to compensate for the new FCA cap. Make sure that you are aware of ALL fees and charges that will crop up during the life cycle of your loan. If you are unsure of anything, call the company up to clarify. This will also help you feel more secure about the company who you are paying money to, as you will have started to develop a personal relationship with them.
Consequences of non-payment
Most companies will undoubtedly try to contact you tirelessly to try to discern the reason for non-payment, regardless of whether you’ve taken secured loans or unsecured loans. This can be both annoying and inconvenient. In the event that they cannot contact you, some companies will choose to exercise their legal right to take you to court in light of your contractual breach. Thereupon, they will apply for a CCJ, which will show on your credit file. Potential lenders may take this as a sign that you do not deal with your debt responsibly, and may result in unwillingness on their part to lend to you.
Unsecured vs secured debt
Lastly, consider the kind of debt you will be incurring. If you are borrowing a significant amount and you do not have a spotless credit record, taking on a secured loan might be a good idea. A secured loan involves tying up your loan with the property that you have just purchased, or property that you already own, such as land, a home, or a vehicle, as collateral which the bank can repossess in case you default. It is your way of guaranteeing your creditors that you will do everything in your power to repay the loan.
An unsecured loan, on the other hand, does not require you to put up collateral. Therefore, the bank or lending institution does not have any right to take away your property if you default. However, obtaining a loan might be more difficult because they will be stringent with their requirements, which include excellent credit standing. Interest rates will also be definitively higher.
Conclusion – which loan is best for you?
Overall, instalment loans, whether secured loans or unsecured loans, are a useful option for consumers looking for emergency cash, but cannot afford to repay it in one lump sum. Make sure you fully understand the full terms of condition of any loan before signing the Consumer Credit agreement. Also make sure to work out your exact repayments using an online calculator, calling the lender to confirm – if necessary.
In the event that you cannot make a payment, it is best to contact your creditors immediately. Failure to do so can result in uncomfortable consequences. We hope you found this article about looking beyond payday loans informative. For more guidance and tips, you can read some more articles on our website written in easy to read terms. Happy borrowing!