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The Difference Between Secured Loans And Unsecured Loans


To be a smart borrower, you will need to understand the differences between each type of loan available to you. Here’s what you need to know.

Understanding secured loans

Secured loans are loans which are backed by an asset, like a house in the case of a mortgage loan or a car with a car loan. This simply means that when you take out a secured loan, you have to use some thing of value that you personally own, such as your automobile, house, or other valuable personal property. This is known as collateral.

The lender holds the title or deed to the collateral or places a lien on the collateral until you pay the loan off in full. If you don’t repay the loan in full, the creditor has the right to take possession of the collateral and apply the proceeds of the sale of the collateral into the debt that is outstanding.

Even though lenders repossess property for defaulted secured loans, you could still wind up owing money on the loan if you default. When creditors borrow money, they market it and use the proceeds to pay off the loan. If the property doesn’t sell for enough money to fully cover the loan, you will be responsible for paying the difference.

The borrowing constraints for secured loans are typically higher than those for unsecured loans because of the collateral portion of the requirements. Mortgages and home equity lines of credit are two common kinds of secured loans. Secured loans may have either a fixed or variable rate of interest and can persist for a variable or set amount of time.

You may have a longer period to repay a secured loan and interest rates are frequently lower because the lender holds your collateral and faces less risk if you don’t pay back the loan. The practice of getting approval for a secured loan might take longer and require more paperwork.

How is an unsecured loan different?

An unsecured loan is money that you borrow without needing to use a thing of value that you own as collateral. Most unsecured loans have a fixed term and a fixed interest rate. This means:

you’ve got a set amount of time to repay the loan

the loan payment is the same each month

the interest rate can’t change during the term of you loan

An unsecured loan is not tied to any of your assets and the creditor can’t automatically seize your house as payment for your loan. Personal loans and student loans are examples of unsecured loans because these aren’t tied to any asset that the lender can take if you default on your loan payments.

You typically need to get a great credit history and strong income to be qualified for an unsecured loan.

The approval process for an unsecured loan is usually faster than for a secured loan because there is less paperwork. Additionally, there is normally a lower borrowing limitation for this type of loan. Since you aren’t using anything of value, much like a secured loan, the lender faces a higher level of risk. Due to this, the interest rate for an unsecured loan can be higher than for a secured loan.

Lenders can (and do) report payment history of both kinds of loans into the credit bureaus. Late payments and defaults with the two kinds of loans may be recorded in your credit report.

With secured loans, the lender may go use foreclosure or repossession to spend the advantage tied to the loan. These can result in additional negative entries being added to your credit report. Secured loans also allow borrowers to get approved for higher loan limits. Though you may qualify for a bigger loan, you still have to take care to select a loan that you are able to afford.

When you are picking secured loans, be sure to look closely at the rate of interest, repayment period, and monthly payment amount.

Both secured and unsecured loans may differ a good deal from 1 lender to the next. If you plan to apply for a loan, then try to have a clear understanding of how your loan will probably work, what you are going to need to pay every month over the life span of the loan and what the lender is promising you in return. 

When you are picking secured loans, be sure to look closely at the rate of interest, repayment period, and monthly payment amount.

Before you make any borrowing choice, make sure you can afford to repay your loan in a timely matter without straining your budget.

Anytime you borrow money from a bank, or perhaps an individual, you are taking a loan out. The lender may permit you to borrow the money with just your promise to pay it back. Or, the creditor may require that you use an asset as collateral for the loan. This simple distinction is that the difference between unsecured and secured loans.