Secured and Unsecured Loans, What Are The Differences?

As with any type of financial product, there are pros and cons to taking out any loan, whether that is secured or unsecured. No matter which type of loan you end up getting, a loan is a big commitment that will require monthly payments until the amount is paid in full.

Secured and unsecured loans are very different from one another. Both come with their own sets of rules and advantages. Each also comes with its own disadvantages as well, so it is good to know what you’re getting into before applying for any loan.

Secured Loans

A secured loan requires putting up some kind of asset as collateral. This asset could be a car, furniture, or even a home. For example, mortgages and auto loans are secured loans, so you may already be aware of the disadvantages involved with these.

Secured Loan Disadvantages

In the event that you cannot make your payment, you can expect a repo man to come collect those collateral assets. With a home, this means entering into the foreclosure process. You lose the asset and all of the money you put into the payments, leaving you with nothing to show for it.

Secured Loan Advantages

Even though there’s always a chance you may default on a loan and lose your home or automobile, secured loans have lower interest rates than other loans. This is because there isn’t as much risk to the lender because, if you fail to make payments, they will still get their money back by repossessing the asset.

Secured loans also tend to have longer repayment periods. Even those with poor credit may be able to qualify for a secured loan, although you need to ensure that all past financial problems are taken care of before entering into a new loan agreement.

Unsecured Loans

Unsecured loans do not require collateral. The lender merely relies on your word and contractual agreement as a promise that the loan will be paid back. This creates more risk for the lender, so repayment periods tend to be shorter than with secured loans. One form of unsecured loan is a personal loan taken out from your bank or credit union.

Unsecured Loan Disadvantages

Along with shorter repayment periods, unsecured loans come with higher qualification standards. The better your credit history, the better the loan terms will be. This can mean a high interest rate for someone with less than perfect credit, which means paying back more money over the life of the loan.

Unsecured Loan Advantages

With an unsecured loan, there is no risk that you will lose any kind of asset or property. What’s more, a personal loan is generally cheaper and comes with better interest rates than a credit card or department store card. Some people choose to take out an unsecured loan to fund purchases for which they would otherwise use credit.

No matter which loan type you choose, increase your chances of getting the best rate possible by improving your credit and practicing responsible financial habits.

One Response to Secured and Unsecured Loans, What Are The Differences?

  1. Liz Secured Loan says:

    But obviously, a secured loan is more reliable than an unsecured loan for the reason that secured loan has this loan guarantee that each and every borrower wants to have in a loan.

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