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What is the Difference Between Secured and Unsecured Loans? What’s a Guarantor? Characteristics

     Do you need some money? Do you want to take out a loan? You must know there are some alternatives for borrowers to choose from. For example, loans can be secured or unsecured. If you need to understand how everything works, you’ll find the answers in this article. We’ll talk about what these kinds of loans offer and, what are the responsibilities of a guarantor in the contract. Also, towards the end of the reading, you’ll find a list summarizing the most significant differences and characteristics between secured and unsecured loans.

Following, you’ll find seven questions of great importance answered about unsecured loans:

1) What is an unsecured loan?

    Let’s commence by explaining what’s known as unsecured loan. This loan won’t require the applicant to present collateral as guarantee of the payment. I mean, the approval of such loan will depend on the applicant’s credit history, for instance. In contrast, there’s the secured loan, for which a security is demanded. It functions as the guarantee of the repayment, which means, it is what the lender needs to make sure they’ll get the money lend back. This is so because, in case the borrower fails to repay the money, the lender can take that asset as payment.

2) What’s a guarantor loan?

    As you know, lenders make profit when they charge the interest on the amount borrowed. But, what happens when the borrower can’t fulfil the payment stated? There are certain solutions for the lending party and, in the case of unsecured loans, there’s what is named as “guarantor loan”. The guarantor is the person, other than the borrower, chosen to work as “security” in case the borrower doesn’t pay for the loan. If this is the case then, the guarantor must pay for it.

    There’s the possibility that the guarantor and the borrower be the same person but, in this case, collateral is usually required. You must remember, the lender will always make sure the money will be repaid in some way.

3) How does a guarantor loan work?

    When a person applying for a loan doesn’t have good credit history or, the income is lower than the required by the lending entity for example, this person will need someone to take the financial responsibility.  There’s when the borrower needs a guarantor.

    Among the characteristics of this person working as guarantor they must have age majority and it’s imperative that he or she lives in the country. Of course, the guarantor must cover the requirements the borrower fails to comply with like, for example, credit history and sufficient earnings to pay for the loan in case it needed.

4) What are the responsibilities of a guarantor on a loan?

    The guarantor has only one responsibility in the loan contract: to serve as the guarantee for the money borrowed. This means, the guarantor’s only responsibility is to cancel the loan if the borrower eventually stops repaying the loan. Because of his, this person will not end up with the financial relation until the loan is fully paid.

    However, there’s a chance for the guarantor to release from the contract before the complete payment of the loan. This would be so if it’s a limited guarantor. Limited guarantors have the chance to decide to serve as guarantee for over a limited period or, up to a certain amount. After that time, the borrower will be the only responsible for non-payment.  

5) What is a personal guarantee on a loan?

    “Personal guarantee” is the term used to refer to the legal promise made by an individual that the payments schedule stated will be fulfilled. This is particularity used for business as, in the case the business won’t make sufficient profit to repay the loan, the personal guarantor, take the responsibility of it.

6) Is a personal guarantee a secured debt?

    Not exactly but, up to a certain extent, there are reasons to say that a personal guarantee is a secured debt. The difference is that, for a secured debt, assets are presented as security.  Even though, in the case of a personal guarantee there’s also some kind of security, there’re no items submitted as collateral.

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7) What loan has the lowest interest rate?

    The loan amount and the period to pay the loan are used to calculate the interest of a loan. Noticeably, rates depend on many factors. However, if the loan is unsecured, the rates will probably be higher than with a secured loan because of the risk the creditor faces when issuing it.

    Apart from this, the lowest rate can always be found in government loans as; those loans are partly financed by the government.  This is the main reason why they’re so popular and demanded. If you have the chance to get a government loan, you should take that opportunity and, go for it.

Following, I’ll list some key points for unsecured land secured loans. After checking on it, you can compare and decide on the type of loan that works best in your situation.

Unsecured Loans

  • They aren’t normally used for bigger purchases like, houses for example.

  • They’re likely to have higher rates than secured loans.

  • You will almost certainly need to get a guarantor.

  • The guarantor’s credit history may be affected in the event of failure to cancel the term.

 Secured Loans:

  • Assets are required to act as “security” of the loan.

  • That asset will become the lender’s possession if the borrower doesn’t complete the payment.

  • There are four types of secured loans: repossession, non recourse, foreclosure and, mortgage loans.

  • Applicants may get lower rates if presenting a valuable as guarantee.

    To conclude, when asking for money, it’s important to cover all your options before entering a loan contract. There are as many types of loans as, financial situations, which is great because there’s a solution for almost everyone. Nonetheless, it may be a little confused to try to go over all the information at once. Hopefully, this article helped you organize basic information to work with loans. In case of having more doubts, please, feel certain to leave your question below.

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Questions and Answers

Can you use land as collateral for a personal loan?
Yes, it’s possible but, the entity you work with will decide if they accept it.
What is an example of an unsecured loan?
As it was stated, unsecured loans are those who don’t need collateral. Personal loans are the most common but, student loans or, even credit cards can also be unsecured loans.
Do I need a secured loan to buy a house?
Yes, as the sum of money needed for a house is high, home loans are issued like secured loans.

Leave your rating about What is the Difference Between Secured and Unsecured Loans? What’s a Guarantor? Characteristics

(4,00) / 3 Ratings

Rating: 5
Comment: Unsecured loans may be easier to get but, the total cost tends to be higher.
Rating: 4
Comment: I had to present my car as collateral when taking my home loan.
Rating: 3
Comment: I’m interested in the government loans.

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