The knotty regulations and its nuance often get on borrowers head. As from a borrowers point of view; there is always some desperation in the act that makes one want to do things in haste and give away their word for anything, however such commitments can cost you much more than your actual deal. Look at the process of lending and borrowing as a fair business. There is one lender and one borrower and the product here is money.
Now, when the lender lends their product to some X person, they demand some earnings from it, which is the interest rate. Making money from money seems like an easy idea, however it is far more than what it seems. Lender has bountiful of obligations, qualms and dilemmas regarding repayment, credibility, bankruptcy etc. Since, that is the main concern, it leaves the lender with two choices :
1. To offer Secured Loan
2. To offer Unsecured Loan
As much as borrowers like the congenial backing of money from lenders, lenders too want to ensure that the money they have just given to some stranger is safe and will come back to them. The assessment and establishment of faith is done by some collateral or money and this is known as Secured loan. When a lender protects the amount that he has leveraged with some asset or security; he is offering a secured loan. Usually, the amount of secured loan is higher and the interest rate is low since it has a backing from something which is worthy of subsequent amount and furthermore an assurance that you are willing to pay back the amount.
Unsecured loans on the other hand are the loans without any collateral or security. It is not that these loans do not have any backing and so they are procured less. Both the loans have equally demand and supply in the market. Usually, this type of loan is given by determining the income (current/ future) and the potential of promising future. Lenders take more risk here with unsecured loans in mediums like credit cards, payday loan, personal loans etc which is why the interest rate is really high. The medium of judging your ability to repay is your financial status.
Both the loans are offered in the market at a fast pace since the customers are available in abundance. The five C’s plays a vital role in the procurement of unsecured loans: Character, capacity, collateral, capital & conditions. The industry runs on credibility and trust on both the ends. If you wish to borrow a small amount, then unsecured loans are good for you but for bigger amounts, always go for secured loans as there is less interest rate.
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