The Differences Between Secured & Unsecured Lending

When a borrower arranges secured finance they are giving the lender some means of assurance which is usually the security or collateral over their property. From the lender's point of view, the only viable method to grant finance on a larger scale is by way of a secured loan.
Secured lending is achieved by making appropriate legal arrangements to ensure that in the event of a borrower defaulting on their payments, the lender can stake a claim to certain assets or rights, so as to enforce a recovery, or limit exposure to loss.

The main benefit of taking security is that it provides the lender with a safety net in the event that an individual ceases to make their repayments. The flip side to this reason is that it also has a large impact on a borrower's attitude towards debt repayment. In the case of mortgage lending, the prospect of losing one's home through repossession strikes a significant amount of fear through most individuals. In this way, financial self-discipline and the likelihood of being able to keep up repayments grows stronger.
Security or collateral can be taken over many different types of assets. The most common of which is property however, other forms will typically include:
- Land
- Life assurance policies
- Cash
- Types of investments such as equities, pooled investment schemes, stocks and bonds.

The asset over which security is taken will typically belong to the borrower however this will not always be the case. Finance can also be secured by the use of guarantees and third party security.

In any case where security or collateral is not required for a loan advance, the form of lending is then described as being 'unsecured'. Unsecured lending inevitably involves a much higher degree of risk than its secured counterpart - Loan repayment in this case is completely dependant on the borrower's intention and ability to repay. In contrast, that does not mean to say that secured lending is completely risk free on the part of the lender as it is common for there to be shortfalls in cases of repossession. In an ideal world, a lender will not make a secured loan advance if the applicant is unable to fit their stringent set of criteria - The security simply gives the lender a greater degree of comfort.

Many Banks and Finance houses will have a standard format for loan assessments such as a credit scoring model. The traditional 'personal' approach to unsecured lending has very much been taken away in recent years by the emergence of computer based automated filters with statistical analysis and credit scoring functions.

The traditional methods of loan assessment have had to change in recent times due on the main part to the sheer volume of loan applications which are handled these days.

Again, there are many different forms of unsecured lending. Typically these forms will include:
- Bank/Building Society overdraft facilities
- Credit cards and store cards
- Various types of personal loans.