Knowing the difference between Secured and Unsecured Loans is vital especially if you are looking to apply for a loan, either to pay off your house or a car, to consolidate your debt, to pay school fees for the kids or for any financial emergency you might be faced with. It is important to know that there are two types of loans, a secured loan and an unsecured loan. Both have pros and cons, knowing the difference can assist you to choose the right product that best suits your needs.
What is a Secured Personal Loan
With the secured loan the lender requires assurance of repayment of a loan, it is in a form of assets. This includes a vehicle, a house, or anything that is of value and can be converted into cash, in a case where you fail to pay back the loan.
This form of a loan is known as collateral, it is a security for the lender to know that in any circumstance their money will be paid back by the borrower. A secured loan has its advantages, It’s the most accessible type of loan, it has a lower risk and also has lower interest rates compared to the unsecured loan.
Despite the advantages of a secured loan, a secured loan has its disadvantage this including the risk of losing your car or house if you fail to make a payment on time. Lastly, it usually takes more months for repayment, which means that you incur more interest.
What is an Unsecured Personal Loan
Meanwhile, with the unsecured loan, there is no collateral expected, it is easy to qualify for an unsecured loan. The unsecured loan includes credit cards, personal loan to pay off small expenses. It can also assist you to cover student expenses, to pay for an asset that will pay for itself such as a house. The good thing about an unsecured loan is that your assets are secured as a borrower.
On the other side, an unsecured loan has greater risks to the lender since the loan repayment is not guaranteed. To reimburse for the higher risk, lenders often charge a higher interest rate which is a disadvantage with an unsecured loan, another thing due to its high-risk, debt-to-income requirements are usually stricter, meaning you will not be able to borrow as much amount, and that amount will be around the amount you earn.
Final vedic on Secured and Unsecured Loans
Now that you know the difference between Secured Personal Loans and Unsecured Personal Loans you can make a profound decision on which one to go for what you want to apply for the loan in future.