Secured v. Unsecured Loans

If you have stumbled across these two terms and are not exactly sure as to how they differ from one another and which one you should opt for, we put forth all the relevant information for you to enlighten yourself. While you are likely to come across an array of different types of loans, secured loans and unsecured loans are probably the widest categories loans can be divided in. This means that all these other loans, for instance payday loans, property loan, logbook loans and all such loans must be a part of either of the two.

The first factor to consider is the presence of collateral, which is the single most significant difference between these two broad types of loans. With secured loans, as the name suggests, there is an involvement of an asset that secures your loan and minimizes the risk attached to giving you a loan. When you pledge something as a security, the loan becomes secured and in case of any default, the lender reserves the right to sell off the collateral to recover the funds. This collateral could be anything from your properties to your car. Securing a loan has several benefits, the primary of which is relatively lower interest rates due to low risk. Therefore, it is good choice for individuals who believe they can repay the loan adequately and have something to keep as collateral. However, for those who are either too pessimistic about making payments or do not have an adequate collateral to pledge, secured loans might not be the route to take.

While we can agree to the fact that the presence of collateral might be a very important factor in differentiating between the two types of loans, it is certainly not the only one. Another factor to consider is the importance of having a good credit rating. Your credit rating refers to your official financial reputation, which comes to life as a result of your previous financial dealings. If you have taken loans in the past and have struggled to pay them off, expecting a good rating seems a little far-fetched. With unsecured loans, your credit ratings are given significantly more importance, since there is no security attached to the loan and the risk to the lender is high. As a result, the lender is likely to look at your credit ratings to feel safe about lending you money. This is why most unsecured loans ask for satisfactory credit ratings. However, this importance is subsided when there is a collateral in question. This is because even if you happen to default on your loan, the fact that your collateral would be seized means that the lender would not be highly affected. Therefore, whether to opt for a secured or an unsecured loan goes beyond the initial two questions and also incorporates your credit ratings.

Personal preferences also come into play, as some people prefer securing their loans to enjoy lower interest rates, while other do better with unsecured loans. The ultimate decision as to which one of the two types is better for you has to be made by weighing the above mentioned factors. At times, the loan you want will not give you the choice of choosing between the two options. Take example of logbook loans, whereby you keep your car as collateral to get access to a sizeable sum. In other times, the above mentioned factors would prove to be invaluable in allowing you to know what fits you better.