Secured Vs. Unsecured

Secured loans and unsecured loans are two different kinds of loans that have a set of conflicting features:

Secured Loan

* A loan that is backed by assets (such as a home) that belong to the borrower. Secured loans decrease the risk assumed by the lender because the borrower is offering the assets as collateral. If the borrower fails to make the necessary payments then the assets may be forfeited to the lender.

Unsecured Loan

* A loan where the lender has no entitlement to any of the borrower’s assets if the borrower is unable to make the loan repayments. Unsecured loans carry a higher interest rate and offer less flexibility with repayment.

Secured loans are the standard method of acquiring large sums of money. Even hundreds of years ago, people would take out loans to use for their farms or other needs by using their land as security.

Since secured loans require you to keep your home as collateral, many people without homes or those that do not prefer to attach their home to any obligations are left without finance. For this reason, unsecured loans were launched as an alternative to secured loans. Sometimes you won’t need to use your home as collateral to get a secured loan. Other assets that can often be used include cars, antiques, real estate, savings accounts etc.

Misconceptions of Secured Loans

There are many misconceptions that have led to the sagging popularity of secured loans. Some people believe that by offering their home as collateral they will have to move homes until they are able to repay the amount lent. This is false. The lender can only lay claim to the home if the borrower does not repay the loan. This will be of particular interest to homeowners who do not take secured loans to protect their property.

Another important thing to keep in mind is that you cannot escape the lender even if you have taken out an unsecured loan. Even though unsecured loans are offered without any backing, the lender still finds ways to recover the amount that remains on your loan.

Unsecured loans continue to be the lifeline for tenants. This is in spite of the fact that unsecured loans are more expensive than secured loans. The main reason is that the interest charged to unsecured loan customers is higher due to the larger risk involved for loan issuer.

Terms differ with a Secure Loan

A secured loan offers more favourable terms than an unsecured loan. Besides the low interest rate, there are many more features exclusively for borrowers of secured loans. Many lenders will allow you to extend the repayment period of a secured loan if you wish. Extending the term of the repayment will increase the interest that you will have to pay.

You will have to discuss specific information with your lender so that you set up the right package for you. A finance option that did wonders for your friend’s finances may not work for you. Taking second opinion is always beneficial as it allows you to test the validity of the advice being offered by the lender.

Credit Requirements

A credit rating is the classification of credit risk based on an investigation of your financial resources, prior payment pattern, and personal history or degree of personal responsibility for debts incurred. If you fail to pay any debts, loans, or mortgages then they will be recorded in your credit file.
Although lenders always prefer that you have a good credit history, they do not attach a special importance to it if you are offering collateral, such as a home. The backing is however is absent in an unsecured loan and this is the reason that lenders often demand a good credit rating history when offering an unsecured loan. Lenders who accept to offer unsecured loans to people with bad credit will try to compensate the risk by issuing even higher interest rates.