Secured vs Unsecured Lending
Let’s talk secured vs unsecured lending. What is a security? What does it mean? What impact will either have upon my investment? Well for those of you who don’t hold much regard for high-risk investments, and aren’t likely to be affected in the instance that something goes wrong, probably not. On the other hand, for those of you who like to minimise the risk of losing your money, then yes, it’ll probably be a deal breaker. Whilst secured loans and unsecured loans may sound like the preserve of the alternative finance industry, it’s more commonplace than you may think.
Take your everyday mortgage for example. A mortgage is essentially nothing but a secured loan. In the scenario of a mortgage, the property that you live in (or something of an equivalent value) will serve as collateral in case anything should go wrong- i.e you can’t make the payments. Your property is an asset and will act as the security for whoever you’ve taken your mortgage out with. So, don’t worry it’s not all hi-tech mumbo jumbo, you’re probably more knowledgeable than you think!
Still a bit unsure? No problem. Let’s take a look at the specifics.
What is an unsecured loan?
So, secured vs unsecured lending, where to begin? Let’s first start with unsecured lending. An unsecured loan can be understood as something that isn’t necessarily protected by collateral; there is no ‘safety net’ so to speak. If something goes wrong and the borrower -for whatever reason- can’t repay the loan ( the excuses may range from the banal to the positively outlandish) the lender is left without a leg to stand on. Capital will be lost, with no way of recouping the money. This is, however, exemplary of the very nature of investing. It’s all speculative (despite what your crystal ball says).
What is a secured loan?
A secured loan is essentially the exact opposite to what we’ve just talked about- it’s a loan that acquires a legal charge to an asset in a bid to protect the investment. This asset may physical or otherwise, as long as it covers to at least some extent, the value of the loan being lent to the borrower. Take the realm of property investment for example. If a borrower intended to renovate a house, but needed money from a lender to do so, peer to peer lending platforms (such as The House Crowd) would lend them the money under the proviso that the house that they were renovating was to be the security of the loan. The security value is often determined on the value of the house at the time. If the borrower was unable to finish the project on time and then unable to pay the loan and additional interest, the asset would be seized (depending on the type of legal charge) as a means to repay the outstanding money. This way, the amount of loss experienced by the lender would be minimized, as some of their money, if not all would be recouped from the sale of the asset. Of course, this is not guaranteed as property values can go down as well as up.
In conclusion, when thinking about secured vs unsecured lending, we can deduce that whether a loan is secured or unsecured will have a direct influence on an individual’s decision to invest. Some are comfortable with risk, others are not. With a higher amount of risk, usually comes a higher projected return. You need to consider what’s right for you and how comfortable you are with the risk.
If you’re trying to understand secured vs unsecured lending, it’s a good idea to get an explanation from those who know best. Once you have an understanding solidified you can begin to make an informed decision on what platform is the best fit for your financial circumstance. If you would like to find out more about what we do and how we do it feel free to visit our website and register your account today.