Here’s How Unsecured Loans are Different from Secured Loans

It is not possible for people to have the exact amount of money required to make big purchases always. So, what do you do under such a circumstance? You go ahead and apply for a loan. By loaning a certain amount, it allows you to make the purchase that you wanted. So, it grants you the ability to make a purchase that you previously could not. After that, you pay back the amount you loaned along with the interest charged. But, there are loads of different loans out there. All of them, however, fall into two broad categories: secured loans and unsecured loans.

In order to understand which loan is ideal for you, you will need to know all the pros and cons of each. So, here’s what it is all about.

Secured Loans

Secured loans have lower interest rates and higher borrowing limits. This is because there is less risk involved for the lender. Most of the time the reason is that you have a liability in terms of property or a car. Since you have a greater risk involved i.e. a chance of losing the property or the car if you are unable to pay back the loan on time, lenders can offer you relaxed interest rates. You also get access to longer repayment terms that is lighter on the pocket. The longer the repayment period is the smaller the installments are going to be.

Since you provide the collateral or liability to the lender, so these loans are called secure. The collateral will serve as repayment if you fail to pay your loan. Your collateral depends on the type of loan you take. Some common types include mortgage and home loans, car loans, vehicle loans, etc.

Remember, that when you take up such a loan, the title to your asset will remain with the bank until you can pay it off in full. Banks do this simply to have the upper-hand and also to ensure that in case you default on your loan, they will be able to possess your asset right away, without much hassle.

In fact, when it comes to secured loans, there are two types. One is a recourse loan where the lender can seize your asset and legally be able to pursue you for any outstanding amount of money that you might owe them. The other is a non-recourse loan where the bank gets to seize your collateral but any amount of money that you owe has to be absorbed by them.

Unsecured Loans

As the name suggests, unsecured loans do not have any collateral involved. Basically, the loan has a higher risk for the lender. So, if you go to a bank to opt for an unsecured loan, you will face stricter lending terms. You will face higher interest rates and a shorter repayment period.

But, perhaps the best part about unsecured loans is the fact that you do not need to rely on an asset. There is simply no need to provide any collateral at all when you are applying for unsecured loans. But, lenders such as banks or any other financial institution will be scrutinizing your credit score thoroughly.

A credit score basically allows them to judge your creditworthiness or the ability to repay a loan back in time. Since unsecured loans are risky for banks to give out, they need to ensure that they are loaning money out to the right person. For you, however, the risk is much less. You have no asset tied to your loan and as long as you have a good credit score, you will be able to get unsecured loans.

Unsecured loans usually include personal loans, credit card loans, student loans, and home improvement loans. However, do keep in mind that unsecured loans will not let you get away without repayment. In case you fail to make a payment, your credit score will take a hit. The banks will also inform the credit bureaus. So, the next time you try to get a loan, you will probably face a lot of difficulties because of the previous loan that you could not repay.

Both loans have their own sets of pros and cons. But remember, that nowadays, it is better to opt for a FinTech company than a bank. This is because they allow you to compare loans from other institutions and get one accordingly.

In fact, a lot of these FinTech companies offer loans themselves which carry a much lower interest rate and less strict terms. So, it would be a wise idea to go online first and then see for yourself what suits you the best.

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