When you get a loan by giving a collateral such as a home or vehicle, it is known as secured loan. Only when the full amount (including all applicable fees and interest) has been paid back to the finance company or bank will they release the deed or title of your property. You can also put up bonds, stocks, personal property or other items as collateral as well.
Chances are that you will not be able to get a large amount of money without putting something of value as collateral because most lenders will not just take your word and blindly believe that you will pay back the amount you borrow. Tying up your property as collateral assures lenders that you will repay the loan in full in order to get the property back.
It’s not just new purchases that are used as collateral for secured loans, you could also put up home equity loans or home equity lines of credit. If you put your home on the line, failure to repay could result in you losing your home. The term, the interest rate and the amount you can borrow will depend on your personal circumstances as well as the amount of equity you have in your property.
The benefits of secured loans include the fact that they usually offer higher borrowing limits, lower rates plus longer repayment terms as compared to unsecured loans. The security that a secured loan gives lets lenders assurance that the terms and conditions will be followed while the amount is repaid. Once you have pledged your property, the lender has every right to sell it to pay off the loan in case you happen not to pay back the amount in full at the end of the loan period.
Pros of Secured Loan:
- You will be able to get a much larger amount as loan
- Since there is security, it is easier to qualify for.
- You could get a more extended period of repayment.
Cons of Secured Loan:
- If you fail to repay the amount in full, the property that you put as collateral could be taken away.
- Some secured loans have early repayment penalties.
Personal (Signature) Loan, education loans, credit card purchases etc all come under the umbrella of unsecured loans. As the name implies, unsecured loan is the type of loan in which you will not have to provide a valuable asset as collateral. It is basically the opposite of secured loans. Since there is nothing other than your word that the lender can take in case you end up not repaying the amount, interest rates will be higher than for a secured loan. In other words, more risk means more interest rate. It is not always easy to get unsecured loan. There are many factors which could deny you the chance of getting an unsecured loan.
If you are applying for an unsecured loan, the lender will judge your capability of repaying the borrowed amount by looking into your financial resources. Moreover, your creditworthiness will be judged based on character, collateral, capacity, capital and conditions. Conditions in this regard is your situation and general economic factors.
Pros of Unsecured Loan:
- Cheap, easy and quick way to get the cash you require.
- There is a certain level of flexibility when it comes to choosing how long you have to repay the amount.
Cons of Unsecured Loan:
- Only if your credit history and other conditions are good will you be getting a good deal. Otherwise it can be quite expensive to get an unsecured loan.
- It is completely dependent on your credit score and income. Thus if you are not up to the mark in these aspects you will be denied the loan or you will not get a favorable interest rate.