A Close Look at Secured and Unsecured Loans

The need to borrow money is something that you can never predict, but it seems to happen at least at one point in life. All of us can experience financial struggles that would warrant the need to take out a loan. In knowing your way around loans, you need to be aware of the two basic types, which are the secured and unsecured loans.

Secured Loans

The key word to remember in this type of loan is security. As the term implies, this type of loan requires “security” against the borrowed money, in the form of a valuable asset such as a house or a vehicle. Because of the collateral, secured loan is less risky for the lender, since there’s a property to seize or repossess to cover for the unpaid balance.

One of the advantages of secured loans is that they can offer lower interest rates for the borrower, since the collateral itself is valuable and limits the lender’s risk. This also lets you borrow huge amounts of cash, which might not be possible with unsecured loans. In addition, if you have poor or inadequate credit history, securing collateral can make your loan approval possible. If you got rejected an unsecured loan, your best alternative is a secured loan.

The most obvious disadvantage with a secured loan is that you can lose a valuable property should you default on your payments. If you loaned a large amount, this may take a while before you can pay off the balance in full, and a lot of things could happen during those times. An unfortunate life event for example can make it difficult for you to make the repayments, which can result to foreclosure or repossession.

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Unsecured Loans

Meanwhile, unsecured loans do not require collateral against the loan, but rather you will be granted a loan based on your financial resources and previous payment history. Examples of unsecured loans are credit cards, personal lines of credit, and student loans.

The advantage with unsecured debts is that there’s no collateral at stake, so you won’t have to worry about losing a property. It may also be a perfect option if you don’t need to borrow a huge amount and you are sure to pay back the loan in just a short period of time.

However, because the lender is taking more risk in letting you borrow without collateral, unsecured loans naturally have higher interest rates compared to secured loans. Furthermore, there’s also a smaller limit to the amount you can borrow, since it is not backed up by security. In addition, because of all the credit checks and stricter requirements by the lender, unsecured loans can take longer to get approved.

Both options let you spend your money in any way you want, although some lenders may want to know the reason for you taking out a loan in order to give you advice on what type of loan to consider and how to schedule your repayments.

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