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Types of loan: secured,unsecured, long term and short term loans

May 14th, 2010 by
  • What is an unsecured loan?

    An unsecured loan is a loan that is not backed by collateral or security. These loans are based solely upon the borrower’s credit rating. As a result, they are often much more difficult to get than a secured loan, which also factors in the borrower’s income. An unsecured loan carries less risk to the borrower. However, when an unsecured loan is granted, it does not necessarily have to be based on a credit score. It may be based on historical payment history on prior debt, reflecting in your credit score.
    Decision criteria for making unsecured loan

    Since unsecured loans are not secured against property or any asset, it is more difficult for a lender to get their money back if the borrower defaults on the loan. An unsecured loan has higher risk as compared to secured loan and hence has stricter underwriting rules. In particular, lenders will look at the potential borrower’s credit history and how they have conducted their previous and current credit or loan accounts.
    Interest Rate determination.

    Interest charged on unsecured loans normally depends on the loan amount and level of risk. Generally speaking, the higher the loan amount the lower the rate will be and the higher the risk the higher the rate charged.

    What is a secured loan?

    A secured loan is a loan that is backed by collateral. In the event that the borrower defaults, the creditor takes possession of the asset used as collateral and may sell it to satisfy the debt. Secured loans relieve creditors 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. On the other hand, debtors may receive loans on more favorable terms than that available for unsecured loan. They can also be extended credit under circumstances when credit under terms of unsecured loan would not be extended at all. They can also be offered loan with attractive interest rates and repayment periods.
    Decision criteria for making secured loan.

    Since secured loans are secured against property or any asset, it is easier for a lender to get their money back if the borrower defaults on the loan. A secured loan has lower risk as compared to unsecured loan and hence has less strict underwriting rules. In particular, lenders will look at the value of asset used as collateral or security for the loan.

    Interest Rate determination
    No doubt, secured loans are always provided at lower rate than unsecured ones, it also depends on the credit score of the person asking for loan and the liquidity of the collateral. Highly liquid collateral allows you to get secured loans on lower interest rates. Generally the interest rate increases as the liquidity of the security decreases. If a person has a perfect credit history and excellent credit scores, the secured loans are provided at one of cheapest rates. Similarly, if a person has a bad credit history and low credit scores, he can get the secured loan after providing ample security, but the secured loan would be provided at higher interest rates.

    Long term loans:

    Loans are considered as long term loans if they are for more than three years by the definition of most financial institutions. However, most long term loans are for more than ten years, and, in fact, can be as long as twenty years. A long term loan will generally be put up against collateral or security. Whether it is property, equipment, or some other asset, there usually has to be something securing a long term loan. The rate of interest for short term loans is never fixed arbitrarily. The magnitude of the loan amount, length of the payment period, records of the regular source of income of the person taking loan and his collateral status are seriously counted prior to fix the rate of interest.

    Advantages of long term loans:

    • Long-term loans are usually available are cheaper rates. As long term loans are secured by collateral the lender charges lower interest rates.
    • Long term loam allows one to borrow large amount.

    Disadvantages of long term loans:

    • Long term loans are subject to interest rate fluctuations.
    • The total interest paid is substantially higher in case of long term loans

    Short term loans:

    Short term loans are designed for shorter repaying duration and therefore are not bound by long term obligation. Short term loans are obtained for a smaller amount as you need to repay it quickly and may be provided for any purpose including educational expenses, home improvements, auto repairs, clearing smaller debts etc.

    Advantages of short term loans:

    • Short term loans do not usually require collateral
    • Short term loans are made available in several days or even hours
    • Short term loans require little paperwork
    • Short term loans provide you with money when you feel a sudden unexpected need
    • With short term loans you do not burden yourself with long term obligations

    Disadvantages of short term loans:

    • Short term loans are usually more expensive. As short term loans are not secured by collateral the lender raises interest rates to cover the risk they bear with your short term loan.
    • The lender of short term loans is likely to investigate the credit history of the borrower and it will be offered only when it is found satisfactory.
    • Short term loans are obtained for a smaller amount

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    Published on May 14, 2010 · Filed under: Loan;
    4 Comments

4 Responses to “Types of loan: secured,unsecured, long term and short term loans”

  1. good information

  2. good information, m satisfied

  3. Rajandran said on

    Thanks for the information! It give more idea about short and long term loans

  4. i m satisfied realy good content

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