Warning: Late repayments can cause you serious money problems. For help, go to moneyhelper.org.uk. We are a broker not a lender.
Warning: Late repayments can cause you serious money problems. For help, go to moneyhelper.org.uk. We are a broker not a lender.
Oct 30, 2019
Both unsecured and secured loan have their shares of merits and demerits. Unsecured loans are available for any and sundry, regardless of credit score, asset and hence collateral or security, reference and other such perceived strengths of a borrower. But such loans are also criticised for considerably higher rates of interest. Secured loan is praised for its relatively reasonable interest rate but it is harder to get. Many people think a secured loan takes a long time to be approved. This is not necessarily correct. Secured propositions are just as readily available these days as unsecured loans.
There is one common presumption among borrowers that unsecured loans have variable rates of interest. This stems from the fact that many lenders are noncommittal when it comes to fixed rates. There are clauses in the agreements that leave enough room for a lender to hike the rate of interest. Since unsecured loans already have high rates of interest, any further hike can be a real problem for borrowers. This leads to a misconception that secured loan usually has a fixed rate of interest, which does not undergo any change throughout the repayment term. It is correct that a secured loan is likely to have a fixed rate throughout the term but there is no guarantee.
Homeowners who have dealt with mortgage know that home loan rates can be reviewed. There is the concept of fixed and floating rates of interest in mortgage. This is similar to the fixed and variable interest rates in cases of secured and unsecured loans. If a private and independent lender says that their rate of interest on an unsecured loan will be subjected to review, then it is likely the rate will undergo some change during the repayment term. But if a lender offering secured loan says the same, the likelihood is much less and it is quite possible there will be no change to the rate at all.
Lenders of secured loans tend to change the rates of interest only when there are reviews by the central bank. Such lenders, from banks to private or public financial institutions, do not get influenced by routine market conditions and they have a much more robust profile than smaller firms. They tend to change rates only when absolutely necessary or if their board determines a new course of action. If the central bank hikes the rate, then a lender is likely to increase the interest on secured loan. This can happen during a repayment term. Likewise, if there is a reduction in the rate, then the interest can go down. This is much more unlikely in case of unsecured loan.
Hence, secured loan has just as much chance of undergoing a hike or reduction in interest rate. An unsecured loan is more likely to have a hike in interest rate and a reduction or even the likelihood is almost certainly off the table. There is no generic practice though. Each lender has the right and discretion to increase or reduce the interest rate, whether it is a secured or an unsecured loan.