5 Things You Need to Know about Secured and Unsecured Loans

Every time you borrow money from someone, whether it is from the bank, a friend or even your credit card, you are getting a loan. Now, when you are dealing with a friend, there is a good chance that they will lend you the money with only your word that you will pay them back being enough security.

When dealing with financial institutions, however, you may be required to put up an asset as security for the money you borrow. That is essentially the difference between unsecured and secured loans.

Unsecured Loans Vs. Secured Loans

It is estimated that more than 24 million Americans take up personal loans each year. Whether those loans are unsecured or secured depend on the individual and the kind of lending facility or institution they approach.

Types of Unsecured Loans

An unsecured loan is one that has no collateral tied to it. Basically, the lender cannot automatically and legally seize your property should you fail to pay them back.

To give you a clear picture: a mortgage loan is typically secured with the property. Meaning that if you fail to pay your mortgage, the bank can legally take your house to recoup their money. That is not the case with unsecured loans.

Unsecured loans have nothing in particular pledged as collateral and as such, they are a lot more riskier for the lender but less risky for you, the borrower since the consequences are not as apparent should you fail to pay.

There are very many different types of unsecured loans:

  • Credit cards
  • Auto loans
  • Student loans
  • Payday loans
  • Signature loans

Things such as loans from your friends and family fall under this category. Of course, the lender has other options they can take should you fail to pay them back. Most financial institutions go after your credit rating which makes more difficult for you to get loans at a favorable rate while other will go after your pay (wage garnishment).

Types of Secured Loans

Secured loans on the other hand come with some sort of collateral from you, the borrower. This collateral could be your house, your car, a piece of land or any asset you own that can easily cover the full amount should you fail to pay the loan.

Since these types of loans are much safer for the lender, they usually have very favorable rates. The most common types of secured loans include:

  • Mortgage loans
  • Home equity line of credit
  • Non-recourse loans
  • Pawnbroker loans
  • Vehicle loans
  • Title loans

These loans are usually much easier to get provided you have the collateral to cover it. That is why about 10% of Americans take them out each year.

Getting a loan with bad credit

While it is not impossible to get an unsecured loan with bad credit, it really is quite difficult. The kind of loans you are likely to get will come with stringent payment terms which include very high interest rates owing to the fact that you are a risky borrower. As such, people with bad credit should genuinely consider taking up secured loans using their assets such as:

This is the fasted and most convenient way to get around your bad credit issues while you work on repairing that image. But remember, you have to pay back the secured loans within the term period and in keeping with the agreement otherwise you will lose your collateral.

Where Can You Get Unsecured and Secured Loans?

There are quite a number of options here, the most popular of which are banks. That, however, does not mean that they are the only option you have when it comes to getting either an unsecured or a secured loan. In fact, banks happen to be some of the strictest lenders available today. They are, however, more reliable and have a much bigger lending capacity than most.

Other options include:

  • Credit unions
  • Online lenders
  • Consumer finance companies
  • Peer-to-peer lenders

You could also always consider borrowing from family and friends although you are advised not to. Money and family typically do not mix very well, especially when you fail to pay them back.

Which Type of Loan should You Consider?

Honestly speaking, the answer to this question totally depends on your financial situation, discipline and need. If all you need is a little cash to get you through a rough patch then an unsecured loan is the way to go. But if you are looking for something bigger; something with which you can undertake a worthy financial course such as financing a business, then you need to go for a secured loan.

This is mostly because they are easier to get and lending institutions that offer them have a much larger lending capacity. This means that you will be able to borrow more and actually have a better chance of achieving whatever financial goal you have that drove you to borrow the money in the first place.

Remember, before you borrow any money, be sure to have a solid plan of how you will pay it back. This way, you maintain your credibility, if you had borrowed from friends, and you maintain your good credit rating if you had borrowed from a financial institution.

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