Difference Between a Secured and Unsecured Loan

Posted on 2013-12-31

For some reason, sometimes people have to look for a loan. While there are some people who are looking for loans because they want to renovate their homes, but there are also many people who are looking for a loan due to unanticipated needs. But anyway, whatever the underlying reason, they are looking for a loan to meet the needs that cannot be covered by their financial condition at that time.

When it comes to loans, there are various types of loans available. You can also get loans from banking institutions. The amount of the loan and the instalment options offered by the respective financial institutions are also different. Therefore, if you’re looking for a loan, you have to know what these financial institutions have to offer, and compare them to find the best one.

In looking for a loan, people sometimes have difficulty in determining what kind of loan they should choose between secured and unsecured loans. This is because both of them have their advantages and disadvantages. The following is an explanation of each type of loan, and you can use this as a consideration in determining the most appropriate one for you.

Secured loans

This type of loan is the most common loans granted by financial institutions. It is called a secured loan because when you intend to borrow some money, you need to have something that could be used as collateral, this can be a home, car, or other valuables. This way, if you fail to meet your obligation to repay the loan, then they can take your collateral, auction the items, and use the money to cover your loan.

In secured loans, the lender will have a smaller risk, this is because even if the borrower is unable to pay back the money they borrowed, the lender will be assured that they will get their money back through the collateral. The lower interest rate is one of the advantages of secured loans. In addition, you can also choose a loan with a longer repayment time. This way, the amount of money you have to pay each month to repay your loan will also be lower. Surely this will ease the burden of the borrower, because the borrower does not have to spend most of their hard earned money to repay the loan.

Unsecured Loan

In this type of loan, you do not have to include your belongings as collateral. So you do not have to worry about losing your personal items if you fail to repay the loan. But certainly there is a consequence of that, with no collateral, the interest rate of this type of loan will be higher than a secured loan. This policy is applied by the lenders to anticipate the losses they might suffer if the borrowers are not able to complete the instalment. In addition, the amount of money you can borrow on unsecured loans typically will also be limited, this is also to reduce the risk of loss. And because this type of loan does not ask for collateral, then to be approved, the borrower has to fulfill some certain requirements. Credit card debt, personal loans, and corporate bonds are included in this type of loan.

Today, when you surf the Internet, you will find thousands of financial institutions that offer loans with different interest rates. You only need to compare them to each other, and choose one that gives the best deals for you. It will also be your freedom to choose a secured loan or an unsecured one. Whatever you choose, a careful consideration in determining what kind of loan is best for you will always be beneficial.