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Different sources of credit ? personal and unsecured loans

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There are many different forms of credit currently available, even after the credit crunch; but these vary widely in terms of both overall cost and risk. You will no doubt have seen adverts on television for both personal and secured loans, but what is the difference and which are the best?

This question actually ignores several alternate and cheap forms of credit, like interest free overdrafts, and some credit cards (dependant on usage). It is however safe to state that a personal loan is always preferable to a secured loan.

Secured loans are the type of loan that pretty much any home owner qualifies for, regardless of credit use history; if fact, secured loans may be the only source of credit open to those with poor credit ratings. There is a reason for this ''generosity'', however.

The reason that secured loans are so easily available is that the loan is secured (for the lender) by a fixed asset that you own, and this is usually your home. In simple terms, if you default on your loan repayment, the lender can take possession of your home to recoup the loan. A mortgage is therefore a type of secured loan, in that the bank will eventually repossess if you cannot make repayments. This is pressure enough to ensure that your mortgage payments are met monthly, and one of the worst courses of action that you can take is to increase this pressure by adding further risk to the ownership of your house through securing further credit on it.

Personal loans, on the other hand, are usually unsecured loans. This means that although the lender will take legal action if you do not pay the loan back as agreed, you have not specified a security to cover the lender''s potential loss ? your home is not automatically liable to repossession.

This means that the lenders of personal loans need to establish that you present a reasonably low risk before approving the loan; that is, you are likely to be able to pay back the loan. They make this decision largely based on a predication of your likely behaviour.

Credit scoring agencies compile data about your credit use history and other factors to produce a risk profile in terms of your financial habits, with the highest scores being awarded to those that have, in the past, been most reliable when using credit products.

Lenders reference credit scoring, and then incorporate this into their own decision making process to decide whether or not to approve a loan. You can check out your credit score for free online by signing up for a free 30 day trial, and then cancelling the rest of the years contract before the trial period ends.

Article Source: http://depositarticles.com/

Katharina Beath is a freelance journalist with 15 years of previous experience in banking. They recommend checking out Alliance and Leicester when researching personal loans.

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