The Difference Between Secured and Unsecured Loans

Difference Between Secured and Unsecured Loans

There are broadly two different types of loan, secured and unsecured. They are very different if you are thinking about taking out a loan, then you should understand the difference.

Secured

A secured loan uses something that you own and has value as the collateral. This means that should default (not pay) the loan back then the lender has the right to take that thing. This might be your car, your home or something else that is of high value. This might sound scary, but if you are able to keep up with repayments, then everything will be fine. The benefit of a secured loan is that the borrowing limits are much higher thanks to that piece of collateral. A good example of secured loans are mortgages. If at any point when paying back your mortgage you consistently fail to make payments and are in breach of the contract that you signed with the bank, then they can reclaim the house from you. However, if you make all the payments and complete the mortgage then you will eventually fully own the property, and nothing bad will happen. Secured loans also typically have a much longer period of repayment as well. This means that you have more time to pay the amount back and can break it into smaller, more management monthly installments. They also tend to come with far lower interest rates as well due to the fact that you have put up something of high value against the loan as collateral. The downside of this kind of loan is that it takes longer to processes and there is a lot more paperwork involved.

Unsecured

An unsecured loan is essentially the opposite of a secured loan. You borrow money without having something as collateral. Thanks to this though, they generally have a much shorter repayment time and are for a fixed rate and term. What this means, in reality, is that you have to repay the loan in within a set period of time and the interest rate remains the same for the duration of the loan. If you fail to make repayments, then it can cause the loans balance to increase, but if you set up regular payment dates, then everything will be fine. Unsecured loans also involve a lot less paperwork and can be completed much quicker. However, because there is no collateral they generally have a much higher interest rate. This means that you will end up paying back a lot more than you borrowed.

Which Should You Use?

Both types of loan are useful in different situations. If you need to borrow a small amount of money, then an unsecured loan is best, but if you need to borrow a lot, then you should look into getting a secured loan. Before making any decision, you should understand how much you will need to pay back for either kind of loan and how this will affect you financially. One if generally longer, but you end up paying less overall, and one is shorter with a larger amount to be repaid.

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