Before you apply for a loan, it’s important to know the difference between secured and unsecured loans. So, today’s article will present to you the main aspects regarding secured loan vs. unsecured loan.
Secured Loan vs. Unsecured Loan: The Differences
To begin with, a secured loan is backed up by an asset, such as a car, house, or any other valuable possession. That asset is referred to as collateral for the loan.
If you choose a secured loan, you agree that the lender enters into possession of the collateral, in the case in which you cannot make the repayments. This is called a “lien.” The bank/lender confiscates whatever it is you’ve used as collateral for the loan you’ve taken out.
Additionally, even if the lender would repossess your collateral in the event of defaulted secured loans, you could still owe money to the lender. That’s because the bank sells the asset, and if the sum of money doesn’t make up for the amount you owe, you have to pay for the difference.
You know you’re living in a nightmare when that happens. Not only you are so broke that you can’t afford to pay rent on a new place, but you’re still in debt. Few things can be more terrifying than this situation. There are ways of stopping a lien, yes, but it’s a lot better to never have this extremely perilous problem. You can get a hint of the insurmountable dangers of secured loans.
Moving on to unsecured loans, they don’t include any collateral or assets. Hence, the lender is unable to seize your property if you default on the loan. Personal loans are perfect examples of unsecured loans since they aren’t tied to any assets the lender could take.
To get an unsecured loan, your credit history should be stellar, and you should also have regular, reliable income. Nevertheless, the sums you can take are typically lower.
Secured Loan vs. Unsecured Loan: Which Is Better?
Although a secured loan implies the risk of having a valuable asset seized if you don’t repay the loan, this is a good option, especially if your credit history isn’t the best. So, in the event in which you have been denied an unsecured loan, a secured loan could do the trick.
Secondly, a secured loan could help you to enhance your credit score. Nevertheless, in order to ensure that this happens, you should pay everything on time so that you could notice a distinction in your score. Having a secured loan doesn’t automatically mean your credit score will be favourable forever.
Since the amount of risk is minimum, they are preferred by lenders. Hence the interest rates are much favourable than in the case of unsecured loans.
When it comes secured loan vs. unsecured loan in relation to interest rates, a secured loan could help you get a better deal. The collateral accounts for the fact that the lender is 100% sure you’ll make the repayments in time, so he/she won’t need to singe you with high-interest rates. Even if you fail to make your monthly repayments, they are going to get their money back by liquidising your collateral or selling it at an auction.
On the other hand, the pitfall of a secured loan is that if you fail to make the payments on time, you risk losing an important asset. Apart from that, taking too much debt could make it rather challenging to meet all your financial commitments.
While an unsecured loan could seem like an attractive choice, the interest rates are higher and must be paid in a shorter time frame. Plus, it is harder to qualify for an unsecured loan. The answer to the question “Which is better: secured loan vs. unsecured loan?” might be “Both,” according to your financial prowess and your needs. Both of these types of loans are fraught with pitfalls.
For some, an unsecured loan could be the better choice. For others, its kindred secured loan might be everything they need. There is no common ground, it all depends on the individual’s needs. The truth is, a professional debt counselor can affect your decision so that you won’t make a life-changing mistake.
Final Thoughts
On the whole, we are confident that our short guide on secured loan vs. unsecured loan will help you in making the right decision for your financial future. Selecting a reliable lender is just as important, so make sure you carefully evaluate this aspect, as well.
Make sure you’re not dealing with a lender that has little to no experience in the field he/she claims to be working. Again, you could use a debt counselor here, because he/she will know which lenders are trustworthy and which are not. This way, you’ll be able to stay away from even more problems.
We offer a variety of loan solutions to Australians who are coping with bad credit. If you find yourself in this situation, you shouldn’t despair. Instead, embrace the right tactics to get back on track!
