When you are looking for a loan your bank may give you the option to choose a secured or an unsecured loan. Each has its own set of pros and cons, and there are situations where one may be the better option than the other. Read on to know more about what these types of loans are, and how you can use each to your advantage.
Secured vs. Unsecured Loan
A secured loan is one that is attached to a piece of collateral such as a piece of property like your car or your home. The bank or the lender will hold the deed or title to the property and possession of such is only given to the borrower when the loan has been paid in full. Full payment means that the principal amount plus interests and other fees have been paid.
With this type of loan, the lender has the right to take possession of the collateral if you fail to pay the loan according the terms agreed upon. If you stop making payments on your loan, the lender can foreclose the real property or repossess your car. Aside from real estate and cars, other assets that can be used to secure a loan include stocks, bonds and other types of personal property.
An unsecured loan is one that is given without an accompanying collateral. Common unsecured loans include credit card purchases and education loans. This type of loan is risky for lenders, so they often come with higher interest rates since the lender has nothing to seize if the borrower fails to pay the loan amount according to the terms agreed. Student loans and business financing loans, also called personal loans, are often unsecured. Lenders tend to carefully verify many factors before approving a personal loan. These factors include the borrower’s credit history, ownership of real estate, existing debts and term of the loan.
Benefits of Choosing Secured Loans
Most lenders only allow loans for large amounts that have a security or collateral. Putting a home or car as collateral gives a lender an assurance that in one way or another, the loan will get paid. Secured loans usually come with lower interest rates and higher borrowing limits. Most lenders offer secured loans with longer repayment durations and therefore smaller monthly payments.
Benefits Of Choosing Unsecured Loans
An unsecured loan does not come with an asset risk, which means you do not stand to lose your car or your home if you fail to make payments on time. Most unsecured loans also have shorter repayment terms which means that you enjoy lower costs in interest over time.
An unsecured loan is often riskier for the lender than the borrower and therefore may come with higher interest rates and smaller borrowing limits. In the past, it was hard to get approval for unsecured loans especially for those with existing debts and less-than-ideal credit histories. Today, the existence of non-conventional lenders is making it easier to obtain unsecured loans. Unsecured loans are also faster to obtain, and they typically come with fixed interest rates and fixed monthly payments.
Paying Off Secured and Unsecured Loans
Some people may face difficulties paying off their loans. Experts recommend paying off a secured loan first before paying off your unsecured loans. This way you can avoid losing collateral, such as your car or your house if you fail to pay on time. However, it is also important to make sure that you can pay off your unsecured loan payments on time to avoid increasing your interest rate payments, which tend to be higher in unsecured loans.
Working with Experts to Pay Off Loans
If you fail to pay your loans, you can expect frequent collection calls, lowered credit-scores and collection lawsuits. Fortunately, you can seek help from the experts, so you can start paying off your debts.
A counsellor can help you come up with debt management solutions such as refinancing your loan, coming up with extra income to pay off your loans, taking personal loans from friends and family who are more likely to give you a loan without interest and even filing for bankruptcy. You have more chances of figuring out a good debt management plan with the help of an expert, so you can start paying off your loans today.