Secured Loans vs. Unsecured Loans

Many people are not sure exactly what a secured loan is and how it works. So, let’s start by clearing this up. A secured loan is a loan that has an item as collateral. For example, a home, vehicle or other asset that can be taken incase the repayment of the loan is not fulfilled. This is common way for lenders to agree to lend funds to individuals with a not so great credit history. This is a way for the lender to be sure they will either get repayment of the loan or have an asset that will cover the cost of the loan.

Basically, a secured loan means when and if you miss a loan the loan repayment is guaranteed by your asset. So, if you use your home as your asset for the secured loan and you do not make a payment the home can be foreclosed on. Not in all cases does this actually happen, however it is something to think about, just incase. It can be quite a task for the lender to actually resell the home to make their money back, so they are usually against foreclosing as a first resort.

A lender generally will not try to remove the homeowner and take possession of the home for a single missed payment. For the most part there will have to be several missed consecutive payments as well as no reply to the demand for payments that are sent to the homeowner. Even when the market is good for the home to be sold, taking possession is generally a last resort to collect on the debt.

The final decision as to whether the home is going to be taken is solely up to the lending company itself. Some lenders are not as forgiving and understanding as others. So, being absolutely sure you can afford the loan is a necessity if you are going to use your home as collateral for an secured loan. Along with taking the home, a creditor can take your wages and other assets to receive payment on the debt.

In order for the lending company to take your asset they are required to follow procedure. This includes legal procedures, which many lenders do not want to bother with. As this can sometimes be a time consuming and slightly expensive way to gain repayment of the loan.

An unsecured loan is a loan that does not call for collateral. So, in these types of loans the interest rate required for repayment can be higher. This is because the loan is not guaranteed by an asset. Not having the right to take your asset in the event the payments and terms of the loan are not met, causes for the increase in the interest rate.

By taking the chance of lending the funds without collateral gives the lender the chance to charge more in interest, and in turn charging more for the interest will be able to cover the costs of legal fees if they are needed. The chances of a person missing a payment on a loan that is unsecured are much greater than they are on a secured loan. This is because the person does not have an asset to risk in the event they default.

         

Various Type of Loan Facts and Information