What's the Difference Between Secured and Unsecured Loans?

You may be looking into taking out a loan to make a large purchase, make payments on medical bills or use toward home improvements. A lender may provide two possibilities to an applicant: secured or unsecured loans. Both of these loans may be viable and useful options for an applicant. However, there are some differences between the two types of loans. What should applicants know about secured and unsecured loans before deciding to borrow from a lender?

There are times when it is necessary to apply for a loan, and understanding the underlying principles behind them can help consumers make informed decisions. Understand more about secured and unsecured loans to determine which one may best meet one’s financial needs today.

What to Know About Secured Loans

Loans protected by collateral or an asset of some kind are considered to be secured loans. One has an asset, in many cases a car or home. This is used as collateral against a loan. A loan applicant allows a lien to be applied to the asset. The deed or title is now held by the bank or finance company until such time that the loan is paid off in its entirety. Other assets or collateral may include personal property, stocks and bonds.

Mortgages are among the most common types of secured loans and therefore these loans are the most common way for individuals to gain access to significant sums of money. Lenders want the loan to repaid and liens on assets or collateral help provide assurance that this will occur. Those who fail to make necessary payments may lose their home or other asset.

Benefits of secured loans include lower rates, longer repayment terms and higher borrowing limits when compared with unsecured loans. The drawback is that those who do not pay their loan lose their asset to the lender as they may have to sell it to recoup their loss. A mortgage or auto loan are all examples of secured loans.

An Overview of Unsecured Loans

Unsecured loans are not backed by an asset and a lender may assume more risk. Interest rates are typically higher for unsecured loans as a higher level of risk is involved for a lender. Such a loan is approved when a borrower’s financial resources is deemed to be enough to pay back the loan amount. Approval is based upon the applicant’s character, capital, capacity, collateral and conditions. Examples of an unsecured loanare educational loans and credit card purchases.

A borrower will need to pay back unsecured loans, as they would have to do so with secured loans. However, higher interest rates are often coupled with lower borrowing limits. Those who need to borrow a larger sum may want to do so with a secured loan. This type of loan is useful for those who do not have the assets or collateral to use for a secured loan or who may need to take out a small loan that can be paid back quickly.

Know the Terms and Conditions

Terms may vary based on the lender. Those looking to apply for a secured or unsecured loan should be aware of which type of loan best suits their specific situation. Individuals who apply for a secured loan need to acknowledge the risk that comes with not making timely payments on a loan. Those who do not require a large sum may want to apply for an unsecured loan, as no liens are placed on collateral. Read all terms and conditions of any loan before agreeing to stipulations with a lender or financial company.