A guest article by Andreas Nicolaides of moneysupermarket.com
When researching loans, no doubt you’ll come across the terms, “secured” and “unsecured”, but what does this mean exactly? Both loans are big financial commitments, but one may hold more advantages for you over the other.
A secured loan is a loan that has a particular asset backing it. This means that if you fail to comply with the loan terms, such as repaying it, the asset can be repossessed.
The first type of secured loan that comes to mind is probably a mortgage, since the house and property are assets backing the loan. Homeowners that fail to make their monthly payments are faced with foreclosure, which is when the bank or lender repossesses the home to cover their losses.
Other types of secured loans include home equity loans, car loans and title loans.
The great thing about these loans is that you can borrow much more than you can with an unsecured loan. As there is less risk to the lender, interest rates tend to be lower. People with poor credit histories can often get secured loans, although it may depend on what the loan is for. You may have trouble qualifying for a mortgage but have no issues getting an auto loan, for example The obvious disadvantage is that you could potentially lose the item being financed, whether it’s a home, car, boat, RV, or even furniture.
An unsecured loan doesn’t require an asset. The lender simply relies on your signed loan obligation, to repay the debt. These types of loans include personal loans, cash advances and payday loans.
The great thing about this type of loan is that you don’t risk any asset and you don’t need to be a property owner to take out the loan. Personal loans tend to come with lower interest rates than credit cards and store cards, so they are often used as a means of paying off credit debt to save money on interest. The downside of unsecured loans is that the interest rates can be incredibly high. The interest rates are based on your income level and credit rating, so the higher your score, the better interest rate you will get. You won’t be able to borrow as much money simply because an unsecured debt poses more risk to the lender. The life of the loan also tends to be less. This means that you have a much shorter repayment period, which may or may not be a good thing depending on your situation.
Which type of loan you need would greatly depend on your reasons for needing the financing. Shop around carefully, regardless of which loan you need and compare interest rates and lender terms to find the best loan for you.