What is the difference between a secured and unsecured loan?
Answers
Answer:
What is a Secured Loan?
Flavor No. 1 is known as “secured loans” and is safest for the lender since it contains a built-in backstop. Secured loans require that the borrower have collateral that can be repossessed if the borrower defaults. These are among the most common loans made.
Examples of Secured Loans
Home Mortgage
Home Equity Line of Credit
Car Loan
Loans made by pawn shops
Features
Qualifying can be more difficult: Repossessing a car or foreclosing on a house can take time, and the condition of the collateral is never certain, so lenders want to know a lot about a borrower’s income and credit history before issuing a secured loan.
You Can Borrow More Money: Typical collateral for a secured loan is a high value item, such as a home or car, therefore you can usually qualify for a larger sum of money for a secured loan.
Longer Repayment Schedule: Repayment schedules for secured loans tend to be longer. A typical auto loan is 5 years, and the most popular home loan is the 30-year mortgage.
What is an Unsecured Loan?
The other flavor, “unsecured loans,” are even more common. They don’t require collateral, so the lender is taking a very high risk. He’s accepting the word of the borrower that the loan will be repaid. If the borrower defaults, the lender might try to have the borrower’s wages garnished, but otherwise it’s hard to collect a debt.
Examples of Unsecured Loans
Credit Cards
Student loans
Personal Loans
Payday Loans
With credit cards, you can buy things today as long as you repay the card issuer when you get a bill. If you don’t repay the full balance when the bill is due, high interest rates generally kick in and it becomes very costly for the borrower. Student loans that go into default become a negative mark on a consumer’s credit report, until the consumer resumes regular payments.
Features
Loan amounts are smaller: With the exception of student loans, the size of an unsecured loans is often much smaller than secured ones and the amount of interest charged on balances due is usually much greater.
Interest rates are higher: Interest rates on unsecured loans tend to be significantly higher. The average credit card interest rate over the past several years ranges from 15-18%, while payday loans can cost you 300%-400%.
Answer:
Secured loans are loans backed with something of value that you own, called collateral. Common examples of collateral include your car or other valuable property such as jewelry.
If you’re approved for a secured loan, the lender will hold the title or deed to the collateral or place a lien on it until you pay the loan off in full. If you don’t repay your loan, the lender may take possession of the asset, sell it and apply the proceeds to your outstanding debt.
Due to the use of collateral, the borrowing limits for secured loans are typically higher than unsecured loans. Secured loan rates could be lower as well. Common types of secured loans include mortgages and car loans.
An unsecured loan is money you borrow without using collateral. With nothing of value backing the loan, the lender faces a higher level of risk. This can result in a lower borrowing limit, a higher interest rate and a higher credit score needed to qualify for the loan. Common examples of unsecured loans include credit cards and personal lines of credit.