What is the Difference between a Secured Loan and an Unsecured Loan?

It is important for borrowers to understand the differences between types of loans.

Two of the most common loan types of loans are the secured loan and the unsecured loan.

Here’s what you need to know about each –

Secured Loans

Secured loans are those that are protected by an asset or collateral of some sort. The lender will hold the deed or title of the asset until the loan has been paid in full, including the interest and applicable fees. Secured loans can be helpful if you are looking to borrow a large amount of money as it can give the lender a higher level of assurance that the loan will be repaid.

Secured loans can often offer more competitive rates, higher borrowing limits and longer repayment terms than unsecured loans. However, with a secured loan it is important to remember that if you are unable to repay the loan that the lender has the right to take possession of the collateral and apply the proceeds of the sale of the collateral to the outstanding debt. Some examples of secured loans car loans, boat loans and home mortgages.

The process of applying for a secured loan can sometimes take longer and may require more paperwork ie car registration papers than an unsecured loan.

Unsecured Loans

As the name suggests, unsecured loans are the opposite of secured loans and include credit cards, smaller personal loans and cash loans. An unsecured loan is money that is borrowed without having to provide something of value that you own as collateral. With unsecured loans the lender takes on a higher degree of risk as there is no property or assets used to recover in the case of default, this is why the interest rates can be higher.

The lender will approve the loan on the basis that you can repay the loan with your financial resources and creditworthiness. When assessing this the lender will take into consideration your serviceability, stability and credit history.

Both options offer different advantages and disadvantages, so whichever loan a borrower decides to pursue it is important to clearly understand how the loan will work, what the repayment amounts are, the term of the loan and the obligations of both parties. Most importantly make sure that you can afford to pay the loan back in the set term without straining your budget. Before signing a loan contract for a secured or unsecured loan it is important to give due consideration for the loan product for your needs.