Lending options are divided into secured and unsecured loans. A lender analyses a consumer’s credit history before offering a loan. This is, presumably, the main aspect that will convince a lender to offer you an unsecured loan. So, which one of these two categories is best for you? What are the characteristics that distinguish them?
Explaining Secured Loans
Secured loans include an asset as security, such as a house in the case of a mortgage loan, or a vehicle in the event of an auto loan.
This asset constitutes the collateral for the loan. When you choose such a loan, you imminently agree that the collateral will be transferred to the lender, if you don’t manage to repay the loan.
Moreover, many lenders require you to maintain and ensure the asset, so that you preserve its original value. For instance, a mortgage lender demands the borrower to safeguard the property through the homeowner’s insurance policy. That ensures the value of the estate until you repay the loan.
It is implied that this type of loan doesn’t place as much risk on the lender as an unsecured loan. That’s why interest rates tend to be lower, which is the main advantage of secured loans. Plus, many people choose secured loans because their credit record doesn’t allow them another option.
Furthermore, secured loans also enable borrowers to obtain higher loan limits. Even though you qualify for a large loan, we recommend you to carefully analyse the ins and outs of the situation, and see you if you can afford that. Take into consideration aspects such as repayment period, interest rate and monthly payment amount.
Explaining Unsecured Loans
Moving on to unsecured loans, we will say they don’t involve security. Lenders will issue loans depending entirely on the borrower’s creditworthiness and his/her word to make repayments.
In the past, this kind of loans would be issued with a simple handshake. If the borrower doesn’t manage to make repayments, the lender is entitled to sue the borrower, to obtain the sum of money.
Nonetheless, this process is time-consuming, and legal fees may add up. That is why banks and lenders will charge higher interest rates. What is more, debt-to-income and credit requirements tend to be stricter than those of secured loans?
Other examples of unsecured debt include medical bills, credit cards, and similar retail installment contracts. So, the benefits of unsecured loans are that you don’t need to supply an asset as security, the application process is easy, and the loan purpose is flexible. The disadvantages are that they might have higher fees, there are penalties for late payments, and the interest rates are also quite high.
In conclusion, as you can see, both secured and unsecured loans have their set of advantages and disadvantages. This way, if you cannot decide between the two, take a moment to analyse your financial situation and your current needs. When the pros outweigh the cons, you have found your best pick!