Loans and Clearing Debts

By: Christine Whitfield BA (hons) - Updated: 12 Jan 2013 | *Discuss

 

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When you find yourself in debt sometimes the easiest thing to do seems to be to borrow more money. When you think about it it sounds crazy doesn’t it? You owe money to one person and in order to help you pay it back you have to borrow from another! But, with credit so easy to access in the last few years, it has long been a suitable solution. However borrowing more money can lead to a downward spiral, one that you find difficult to get out of.

There are primarily two different types of loans. They are secured loans and unsecured loans.

What are Secured Loans?

Secured loans are loans which are secured against one of your assets, usually your house. In other words, you take out the loan with the understanding that if you are unable to pay it back you are liable to lose your house. The are often referred to as home owner loans. You should think very carefully before taking out a secured loan as if you take on more than you can handle and fail to make the payments you could be faced with repossession.

Secured loans often have more favourable rates than unsecured loans because there is less risk involved for the lender. The lender knows that it will get a return on the loan either way because even if the borrower refuses to pay it back it can take his or her property. This type of loan is therefore very popular and if you know you can make the payments and you take out adequate payment protection insurance, to cover you should something go wrong, then it could be a sufficient solution.

What are Unsecured Loans?

Unsecured loans are loans that are not secured against any of your assets. Credit cards for example are unsecured. You do not have to have a home or a valuable asset as back up to take out a credit card. In fact almost anyone can get one. How often do you receive letters offering you new credit cards? Pretty often right? However because they are unsecured the rates can be high, sometimes even extortionate. It is vital then that if you take out a credit card you are sure you can make the repayments and you use it wisely.

Unsecured loans can be useful and are often looked at favourably because the loan is not secured against your property and therefore you are not at as much risk of losing it. However the lender is aware of the risk it is getting in to. It knows it does not have the property as a back up if you fail to make repayments and so, to satisfy this risk, it puts very high rates on the repayments.

Loans are a useful form of finance, particularly for things like house developments or a new car. However if they are used in an attempt to get you out of debt they can sometimes serve to make the problem worse, especially if you are not careful about what type of loan and what rate you take. Always discuss your situation with a debt counsellor before taking out a loan to clear debts.

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