I will share complete details about Secured vs. Unsecured loans. I will discuss about several loans like a student loan, personal loan, and even credit cards.
Secured vs. Unsecured loans are the broad categories of loans in the context of involved risk. Risk is a phenomenon of the loan market that cannot be taken away in transactions between borrower and lender.
On the part of both lender and borrower, some risk is involved, and as a result, there are many measures put in place by lenders to cushion the effects of these risks for a soft-landing, to avoid debt crises.
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Secured Vs. Unsecured Loans
As a potential borrower, it is essential to understand the dynamics that exist between secured and unsecured loans. This is vital to your financial awareness and literacy, much needed in the loan market. This piece collects all the necessary information about both categories, including the pros and cons of each one.
In the list of Simply put, a secured loan is one that requires collateral to be put on effect. Collaterals are typical to compensate the lender in case the borrower defaults. From stocks, bonds, and property to personal effects, collaterals can be anything as long as the value of it is proportional to the loan taken.
With the collateral on the line, the borrower is bound to repay the taken loan. Secured loans are usually for large amounts of money, and since large sum loans put the lender at risk, collaterals are taken very seriously.
In the case of default, the lender is authorized to take possession of the collateral and sell it off to make up for the loss. Because of the presence of surety, secured loans usually don’t come at high-interest rates, if at all. Other perks of secured loans are that large sums can be borrowed, and repayment schedules are much more flexible, spanning many years if agreed. If we compare both Secured vs. Unsecured loans then secured loans are always preferred.
Types of Secured loans
- Auto Loans: These are also known as car loans, and they are taken to purchase vehicles for personal use, or business. An array of lenders offer auto loan services, including traditional ones like banks and credit unions.
- Boat Loans: These cover the costs of purchasing boats, and with typically monthly repayment schedules, interest inclusive. Like a car loan, the boat purchased after taking this loan serves as collateral.
- Mortgage: This is a type of loan you take to purchase a home. Mortgages have been around for many years and many people have successfully pulled off repayments. This secured loan uses the home purchased as collateral and often comes with interests, taxes and insurance fees.
- Home Equity Line of Credit: Also known as HELOC, this type of secured loan is similar to mortgage to the casual observer. However, it is different in that it makes use of the borrower’s home equity as collateral.
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On the flip side, unsecured loans are the type of loans that typically do not require any collateral. Loan amount limits are lower in this category, and since the factor of risk remains uneliminated, lenders charge high-interest rates which accumulate increasingly when the borrower delays or defaults in repayment. If you want to take any one of this Secured vs. Unsecured loans. Then always try for Secured loans.
If a potential borrower is lacking in assets that can be used as collateral to obtain secured loans, this may be a more viable alternative. However, unsecured loans are not for everyone. When a lender is approached for an unsecured loan, the potential borrower must meet certain eligibility criteria to be considered.
These criteria are also known as the five Cs of credit, and are:
- Capacity: This allows the lender to figure out whether or not the potential borrower is financially able to repay the requested loan amount. The monthly and annual income of the borrower is ascertained to gauge this.
- Character: This is judged based on the potential borrower’s credit score, employment and work history, references and guarantors provided.
- Capital: The lender investigates the potential buyer’s savings accounts, investments, and other relevant backgrounds.
- Collateral: This is applicable to secured loans as well.
- Conditions: The lender will ascertain if the potential borrower is fully aware of and able to comply with the conditions of the loan.
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Types of Unsecured Loans
Unsecured loan lenders get to sleuthing every time a loan is requested by either a new or old-time borrower to be up to date with their financial status. If you are looking to take an unsecured loan and you meet the afore-listed eligibility criteria, here are the types of unsecured loans you can choose from:
This is a widely explored option that has put millions through school (especially college) for many years. Both the federal government and private lenders provide this loan service to eligible students for continued access to education. Student loans can be deferred while the borrower is still in school, and interest rates for loans in this category are typically lower for ease of payment. Apart from the generic tuition fees, student loans are taken to cater to a wide range of education-related needs like student accommodation, purchase of books and other materials.
Student loans can be subsidized or unsubsidized.
Credit Card Loans
Credit card loan transactions occur every time a person uses a credit card. Whatever expenses you settle with your credit card is charged to your credit card issuer for you to repay at a later date. Credit card loans are a preferred alternative for short-term, small-amount advances pending repayment. Although known to incur typically high-interest rates, credit card loans are still a go-solution to financial emergencies for many people. While some credit card companies offer a “grace period” to the borrower before accruing interests as stipulated by regulations, others begin theirs right from the moment the credit card loan is taken.
Banks, credit unions and other financial institutions are known to give out credit card loans.
Personal (signature) Loans
The fine line between personal loans and personal signature loans is that the latter simply requires the potential borrower to sign and promise to repay the loan as collateral for the loan. This kind of loan can be used for anything, and many times, the lender requires that a third party sign as guarantor for the borrower in case of default. This type of loan is also known as a “good faith loan” because it requires that the potential borrower have an excellent credit score to have access to funds.
While lenders abound for you to choose from, taking a loan is a step you take only out of necessity. Take small amounts per time, and only when they are very needed to avert financial constraints. You can choose yourself from Secured vs. Unsecured loans as sometimes they both are beneficial.