Difference Between Secured Loan and Unsecured Loan

Difference Between Secured Loan and Unsecured Loan

Difference Between Secured Loan and Unsecured Loan

Many times, we are not financially capable of buying an asset on our own. In such a case, banks and financial institutions come to our help. Loans can be taken for a variety of purposes. There are mainly two types of loan that can be provided to you. These are secured loans and unsecured loans. To select the right type of loan, you need to understand the difference between these terms.

Secured loan

Lenders prefer sanctioning secured loans to borrowers.  These types of loans are secured by a personal mobile property and/or immobile property. This can be a house, a boat, a car, stocks or even bonds. When a property acts as a collateral to secure a loan, then the lender gets an ownership rights on the asset.

 

 

This right is maintained until the loan gets fully repaid to the lender. Failing to pay the loan, can cause foreclosure of the loan and seize the collateral. Lender has the right to recover the default payment amount by selling the collateral.

Benefits of secured loans

  • This loan allows you to borrow a large amount. This is because lenders are assured that they will recover their loan amount back, either by means of loan repayments or property sale
  • As the loan lending firm is taking less financial risk, these loans come with a lower rate of interest.
  • A few types of secured loans such as home equity loans and mortgages allow eligible individuals for tax deductions for the amount of interest paid on the loan every year.

Drawbacks of secured loans

Your personal property that has been kept as a collateral is on a huge risk. That means, if you face any financial difficulties and are unable to pay back the loan, your lender has all the right to seize it and sell it. In this way, you are at risk of losing your collateral asset.

Unsecured Loan

These loans do not need any specific property to be kept as collateral to get the loan sanctioned by the lender. Instead, it is granted to the borrower on his ability to repay the loan.

You may need to provide information regarding your savings, income, credit history and employment at the time of loan application. Some of the common forms of unsecured loans are student loans, credit cards, and personal loans.

Benefits of unsecured loans

  • For people who don’t have any collateral to put as a security, would find this loan option useful.
  • The application procedure for an unsecured loan finishes very quickly as compared to the procedure of acquiring a secured loan.

Drawbacks of unsecured loans

  • Interest rates on these loans are comparatively higher than secured loan rates.
  • This loan is hard to obtain as to get this loan a person needs to have a positive credit history and a regular source of income.

Conclusion

A secured loan is one that is tied to an asset, which is not the case with an unsecured loan. Learning the difference between a secured loan and an unsecured one will help you make an efficient and wise borrowing decision.

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