Secured Vs. Unsecured Loans – What Are the Advantages and Disadvantages That Need to be considered?

 

Loans are the primary financial products offered by banks. Borrowing money through them has become increasingly easier and the limits on how much money an individual can get have grown in the last 10 years. While each loan may have different terms and conditions, depending on a variety of factors, such as the credit rating of the borrower and his relationship with the bank, almost all financial products can be divided into one of two categories: secured and unsecured. This characteristic plays an important part in the borrowing limits of a loan, as well as how affordable they are and the various restrictions that lenders might attach to them. Generally speaking, the type of loan is the most important detail in the agreement and it can have serious consequences for the borrower.

This having been said, what are the differences between the two and why do they matter?

By definition, both of them enable individuals to borrow certain amounts of money. This means that they have values, durations, and interest rates, as well as other possible terms and conditions. These are all common characteristics of any financial product offered by banks and private lenders.

Secured Loans

Secured loans are often more difficult to obtain than unsecured ones such as payday loans. This is usually because the borrower needs to have a great relationship with the lender, which means that an individual should have at least a short financial history that banks can analyze, before applying for a secured loan. This having been said, the fact that these loans are secured means that the borrower must offer collateral to borrow money. This collateral is usually in the form of a piece of real estate such as the borrower’s home, but lenders may agree to secure loans against other items that have very high values, such as art or jewellery. Having the loan secured against the borrower’s’ property also enables lenders to offer considerably lower interest rates than those for unsecured deals.

The downside is that if the borrower cannot repay the money, the bank will be able to take possession of the property that has been offered by collateral. However, this rarely happens as most lenders allow individuals to first refinance their debt or consolidate it.

Unsecured Loans

Unsecured loans do not require any collateral and are easy to access by individuals who do not have a considerable financial history. In many ways, unsecured loans are great tools for those who want to build up their credit rating, provided that they are used sparingly and repaid on time. These loans have slightly higher interest rates, lower terms (usually between two and five years), and lower values. The main advantage is that getting an unsecured loan is faster than an unsecured one. Most lenders even offer same-day unsecured loans that enable individuals to get the money in under 24 hours from the submission of their application.

Which Is Better?

There is no right answer to this question. It all boils down to the needs of every individual. Secured loans are traditionally preferred by individuals who need large amounts of money and have a lot of financial stability. These also have longer durations which means that they are better for people who have a stable financial life and can make payments for up to 10 years. On the other hand, unsecured loans have a shorter term, lower values, but do not require collateral. As a result, they are more useful for buying household appliances or electronic devices such as laptops, phones, and tablets.

What Does Your Credit Report Mean and How You Can Check It?

All banks, as well as a large number of other private lenders, use an individual’s credit report to decide if he is eligible or not for various types of credit. In many ways, a borrower’s credit report is his financial calling card and contains all the information that lenders need to understand how the individual manages his personal finances and what his spending or borrowing habits are. This having been said, keep in mind that most lenders use this credit report in conjunction with other formulas when deciding if someone will get a loan or not. However, the way in which the credit report is compiled is the same for all people. Here is what you need to know about it:

Who Compiles an Individual’s Credit Report?

Credit reports are compiled by specialised companies that are called CRAs, or Credit Reference Agencies. These gather financial information from all the individuals that use banking services and create these reports. In the UK, the major CRAs are:

  • Equifax;
  • Experian;
  • TransUnion;

It is important to mention the fact that each of these CRAs has its own database, as well as a separate way of compiling the data. This means that each one of them has a different credit file. When checking your credit report, it is recommended to check the files from all three CRAs as there is no way of knowing which one the lender might use.

What Is a Credit Report?

An individual’s credit report is a file that contains a wide variety of personal financial data. This includes:

  • A list of the individual’s bank accounts, including credit and debit cards;
  • Details of other individuals that have had joined financial affairs with the borrower (for example, co-signers and children that may be authorised credit card users);
  • Public record financial information (such as home repossessions, bankruptcies, current debt, and others);
  • An individual’s current account provider;
  • Electoral register details;
  • The name, date of birth, the previous and the current address of the borrower;
  • County Court Judgements and legal charges such as fraud and identity theft;

Who Has Access to an Individual’s Credit Report?

As it is clearly visible from the details mentioned above, an individual’s credit report contains a lot of personal information that should not be disclosed to the public. As a result, there are only a few companies that have access to your detailed credit file. This includes banks, as well as other private lenders that you get loans from, and also landlords and employers. However, the latter two will only see the less sensitive details such as electoral register information, insolvency records and County Court Judgements.

How Can an Individual Check His Credit Report?

The easiest way for anyone to check his credit report is by going to the website of any of the CRAs mentioned above and submitting a request to see the file. One important detail that you must keep in mind is the fact that some CRAs give individuals this access free of charge, while others will require that they pay an access fee. These websites will give you access to the online copy of your file, however, it is also possible to get a written one. This is done by requesting a written copy of your financial report from the Information Commissioners Office.  Regardless of which way you choose, do not forget that every CRA may have a different credit file, which means that you should check all three of them in order to get a better image of how your credit report looks.

What Can You Do If Your Loan Request Is Not Approved?

 

Regardless of how accessible most lenders make their financial products, some individuals are bound to be refused when they apply for a loan. This, however, may not be as dire of a situation as it may seem. First of all, having one loan request rejected does not necessarily indicate an issue on part of the borrower. Depending on the financial climate and the state of the global economy, certain lenders may decide to limit the number of loans that they offer, without informing the potential borrowers. This having been said, if this is not the case and the lender refuses the loan as a result of an eligibility issue, there are a few things that individuals can do to figure out what the problem is and to solve it.

Ask the Lender for Clarifications

The refusal of a loan request does not always come with explanations, especially if the application was sent over the internet. However, individuals can get in touch with the lender and discuss the issue. Please keep in mind that this may require you to personally go to the bank because the lender may not be able to disclose personal information over the internet or the phone.

In most cases, the lender will not only explain the reason for the rejection of the loan request but also offer alternatives. If there are none, ask the bank clerk to explain what you would need to do to be eligible for the loan.

Check Your Credit Rating

There is a big chance that if your application is refused, your credit rating may be too low. Unfortunately, this information is usually not offered directly by banks, which means that you will have to verify it yourself. An individual’s credit rating can be checked using the websites of the major credit reference agencies such as Equifax, Experian, and TransUnion. Here you will be able to check your credit score, as well as your credit report. This should give you all the information that you need to understand why you were refused the loan.

Try Applying For a Different Loan or From One from another Lender

If you either have a low credit score or some other issue that has prevented you from getting the loan, it may be possible to be qualified for a different one. Look at the other types of loans offered by the lender, or at the ones offered by other companies. Keep in mind that every bank has its own eligibility requirements and standards when it comes to the borrower’s credit rating.

Check the Borrowing Options Offered By Online Lending Platforms and Services

If nothing else works and the lenders that you go to do not agree to give you a loan, there are other ways of legally borrowing money. There are hundreds of online platforms that enable users to borrow money without having to pass credit checks. Keep in mind that these platforms are legal to use and they obey the same laws that banks do. However, most of them do not report their transactions to any of the national credit reference agencies.

This means that borrowing money from them will not affect your credit score, and also that your financial history will not matter when deciding if you are eligible or not for a loan. In most cases, online lending platforms only require that users provide proof of identity, proof of income, and proof of address. This having been said, do not forget that most online lenders offer higher interest rates than banks. While it may be more likely to get a loan, it will be more expensive than what you would pay at a bank.

How Useful Is It to Have a Savings Account for Your Children?

  

Whether we are talking about saving money for unexpected expenses or simply putting it aside for the future, savings accounts are the way to go. Almost every lender offers these financial products and, in most cases, they come with great benefits for the borrower. This having been said, is it a good idea to open a savings account for your children? Generally speaking, yes, doing so is a great idea, however, it is important to first consider how the money will be used and whether or not you have the financial stability to contribute to the account regularly. This is especially important when looking at how certain private lenders and banks specify that the account holder must contribute a minimum amount of money each month or year to be eligible for certain bonuses.

A Savings Account Is a Great Way to Save Up For a Child’s Education

University education can be extremely expensive. Even if we are to ignore the obvious taxes that must be paid by students, the equipment, textbooks, and other learning materials are never cheap. While it is a common practice for students to apply for a student loan, this course of action also leaves them with a large debt that they must repay after they graduate. However, opening a savings account when your children are very young and contributing to it regularly can give them the chance to go through university without worrying that they will have to repay a large loan once they finish. This can enable them to take advantage of opportunities that would otherwise be inaccessible to them.

It Can Be a Tool to Teach Them Financial Responsibility

It is often difficult to teach children (and sometimes even teenagers) how to be responsible with their personal finances. Opening a savings account in their name and allowing them to contribute to it will help them feel a sense of accomplishment when they the money that they are gifted. Furthermore, it places a large responsibility on their shoulders and gives them the opportunity to plan what they will do with the money once they decide to withdraw it. At this point, it is important to mention the fact that parents can block their children from withdrawing money from a savings account, provided that they are underage.

They Learn How to Use the Banking System and Build Up Their Credit Rating

When a parent opens a savings account for their child and contributes to it regularly, the latter will slowly build up his credit rating. This enables children to already have a financial history and a relatively high credit rating once they are of age. Furthermore, by allowing them to contribute to their own account, you will be teaching them how to use the banking system. They will be able to go to the bank, deposit the money, ask for a bank statement and check their balance, etc.

It Saves Parents a World of Trouble on a Financial Level

By opening a savings account for your children and contributing to it, you will ensure that they have a financial safety net that they can use. This whether they decide to go to University or want to move out, they will already have the money that they need in the savings account. In addition to this, the savings account can be invaluable if there is ever a medical emergency that requires a large amount of money.

Generally speaking, opening a savings account for your children may be the best decision that you can make for the whole family. It gives parents peace of mind, it can be used to educate the children as well as offer them a university education.

5 Steps to Create a Great Personal Budget

Creating a personal budget can do wonders for an individual, regardless of his monthly income or expenses. For most, it is difficult to see exactly how much money is wasted from one month to another, until they write everything down and start calculating. This having been said, while creating a personal budget may sound easy, it is not as simple as most would think. This task requires a lot of planning, research, and a bit of discipline. The advantage is that you only have to set up the budget once, and you will be able to use the expense plan for the next several years, even if your income changes or new expenses appear.

Look At How You Are Currently Spending Money

The first step is to look at how you are currently spending money. Create an expense journal and make a note every time you spend money. This journal should include everything from what food you buy to the amount of money that you spend on transportation. This data will enable you to divide your income to keep up with important monthly expenses.

List All the Essential Monthly Expenses

Once you have collected all the necessary information, it is time to start creating lists. Look at your expense journal and select all the items that can be classified as essential, along with how much you are currently paying. Include expenses such as rent, groceries, long-term medical treatments and ongoing procedures, loan repayments, mortgages, and utility bills. This list will contain all the expenses that you will have to pay no matter what happens. This means that you will pay these first.

Look at What Inessential Expenses You Are Currently Paying

Next, you should create a list of all optional or inessential expenses that you currently have. Things like Netflix subscriptions, food that could be classified as creature comforts, should all be included here. Furthermore, this is the point where you can also add other things that you would like to buy in the near future. Again, this list should only include ongoing expenses. One-time purchases should be added in a separate list.

Factor In All Forms of Income That You Have

Figure out what your total income is. Include only stable sources of income, such as your salary, allowances, and benefits. This amount is your absolute spending limit.

Create the Budget and Follow It to the Letter

Lastly, create your budget by looking at how much you earn every month, what your essential expenses are, and how much you are left with after paying for them. The secret to creating a functional budget is to look at your income and first plan your important expenses. Once the value of these essentials is subtracted from your income, you will be left with an amount of money that you have to divide between creature comforts and your savings account. Look at your optional expenses list and select the ones that are the most important to you. Generally speaking, it is recommended to keep the cost of these under 50% of the amount that you are left with after paying your essential expenses. Lastly, direct whatever money you have left towards your savings account. Doing so will not only give you a buffer in case your income is ever reduced but will also enable you to make larger purchases in the future.

Once you’ve created your budget, it is all a matter of discipline. While it may be hard to avoid overspending at first, it will benefit you in the long run. This having been said, if an important expense ever comes up, such as home repairs or a medical bill, it is ok to disregard the budget. Emergencies should always have priority over everything else.