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Secured Loans vs Unsecured Loans
With so many options for banks and lenders to provide money, deciding which loan type fits your situation can easily become overwhelming. Not only are there many different lenders and financial products, but there are so many options for loans. And as with almost everything in the financial world, not all loans are created equally. So thinking all loans are the same, is a level of ignorance that will not be blissful in the long run. While we address the various loan types in this blog post, here we will take a look at secured loans, and unsecured loans.
Unsecured loans are loan options that do not require collateral like a home or car, in the event your loan defaults. For these loan types your personal assets (collateral), are not at risk of being seized and used as a method of repayment. Instead of the loan being secured by collateral, it is based on the borrower’s creditworthiness. Since there is “nothing to lose” for the borrower, unsecured loans are a riskier product and will typically require higher credit scores for approval.
Although unsecured loans do not require collateral, in the event of a default the lender may permit a collection agency to collect the debt, or even take legal action in some cases. Common types of unsecured loans are personal loans (such as debt consolidation), student loans, and credit cards.
Unsecured loans which are also known as personal loans, or signature loans may sometimes allow loan applicants to have a cosigner. Who is agreeing to incur the obligation to fulfill the debt if the primary borrower defaults. In which case, results in a lowering of credit score for the applicants, and in turn will reduce the chance of getting credit in the future.
With secured loans, collateral is typically required as part of the terms for the loan. For these loans, the collateral is how the lender reduces the risk of the loan defaulting. This is often because the borrowers for these loan types usually have challenged credit. When the collateral is attached to the loan, the lender now has a lien on that asset. The lien is a legal right that the lender now has against the asset being used as collateral. With the use of collateral, the lender is able to provide a lower interest rate to the borrower.
Two common examples of secured loans are mortgages and auto loans. Where the collateral inherently built into the loan. In both cases, if the payments are defaulted on the lender has the full legal right to re-claim the asset. With secured loans, there may be a credit check pre-requisite, which is factored into the lender deciding the interest rate.
Both secured and unsecured loans have many advantages, and can be beneficial when leveraged properly. Unsecured loans may look tempting because no collateral is required, however they greatly factor in your credit score. Whereas, secured loans also have allure, though part of the requirements to be approved is to agree to have an asset be “on the line” in case you are unable to pay the loan.
