Secured vs Unsecured Loans

Sam Jackson

October 14, 2009

November 13, 2018

Secured vs Unsecured Loans

When it comes to loans, there are two main categories that are worth mentioning. In this article we will compare secured loans and unsecured loans. Both have benefits and disadvantages, but the borrower's credit history also determines which one is open to him or her. Another key element that influences the choice between secured or unsecured loans is the amount to be obtained.

With secured loans you need to know that this is a credit backed by the borrower's asset. So in order to take out a secured loan, you have to give the title deeds of your property or car as a guarantee for the creditor. However, the risk such a loan carries is usually compensated by providing the borrower with better loan terms.

So what are the advantages of a secured loan? First of all, due to the lender's higher security, he or she provides the borrower with lower interest-rates and initial fees. Therefore the monthly payments will also be lower, and the total cash flow repaid for the loan is lower as well. This way the loan can be repaid sooner.

Thirdly, with secured loans it's possible to take out a larger amount of money, and you may obtain a loan for specific purposes, which would not be possible with even the best unsecured loan. This means a secured loan may be used for home improvements, for setting up a business and so on.

Fourthly, borrowers may opt for a longer repayment period and this helps them manage their payments better. If needed, these payments may be reduced for a certain period. So generally speaking, secured loans are more flexible than unsecured ones.

But what are the disadvantages of a secured loan? The asset the borrower offered as collateral is in danger, as if you cannot comply with the loan agreement's terms and conditions; you can lose your home, car or both. So by missing a payment no matter what your reason may be, you're risking your home being repossessed.

With unsecured loans, the key element is that this loan is less risky: it is borrowed against one's personal income. For instance, you can take out a personal loan against your wages and any personal income you have. The main advantages unsecured loans have are the following:

Most of the time they are quicker to obtain (as there is no need for property-valuation and reliability-checking), and due to the fact that the amount being borrowed is smaller, unsecured loans are easier to repay. Some people start out their credit history with a small unsecured loan with the purpose of borrowing a larger loan after that. Finally, with an unsecured loan you do not risk losing any assets if you can't meet certain terms.

However, there are certain disadvantages when it comes to unsecured loans. You are restricted to a rather small loan, and the interest rate is higher as well. There is less variety and flexibility as is characteristic of secured loans: lenders cannot provide you with as many unsecured loan types and there is no option to reduce the monthly payments. In addition to these, shorter time is given to the borrower to repay the loan. Finally, people who intend to qualify for an unsecured loan usually need to have a good credit rating.

All in all, both secured and unsecured loans have some clearly identified pros and contras. Therefore the choice between them depends on one's specific financial and personal situation as well as one's needs.

Written by Guest Author: David Rivers

Sam Jackson

Money Dashboard

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