Because of financial shortage sometimes people take a personal loan from financial institution or banks. They take loan for many purposes like to set up a new business, wedding, holiday planning, education and much more. One can obtain loan on the basis of his/her income. You should sign personal loan agreement with banks. It contains the terms and conditions, the loan amount, interest rate and the duration of loan repayment. Generally there are two types of personal loans such as secured loan and unsecured loan. Both have their advantages and disadvantages. Unsecured personal loan is associated with a high level of risks and carry a higher rate of interest.
Risk associated with unsecured personal loan
Mostly the people who have nothing to pledge as collateral and those with a bad credit history are offered a high risk loans. Usually it’s a short term loan as it involves high interest rate and small amount. Generally this loan is easily available. It carries higher rate of interest and higher risk is associated mostly for the lenders because there is not any collateral involved in the loan agreement. In case of failure of repayment of loan and interest the recovery process will become very difficult and expensive.
Unsecured loan is also very risky for the borrowers because it carries higher rate of interest as compare to the secured loan. Sometimes borrower can’t arrange his/her monthly income and expenditure hence fail to repay loan money. As it can be said that unsecured personal loan becomes risky for borrower as well as lenders.
Risk associated with secured personal loan
Another way is to opt for secured personal loan. It carries lower rate of interest as compare to the unsecured personal loan. In this loan borrower pledges some property to collateral the loan. If borrower fails to repayment of the loan lender will take a possession of the property and might sell it to collect the loan amount. It is risky for the borrower as he/she pledge property and if fails to make payment the property will be sold. Usually the duration of the loan is longer and it is very expensive as it carries more amount of interest payment.