What’s the difference between a secured and an unsecured loan?

Regardless of the amount, taking out a loan is a big financial decision and it should not be taken lightly. Prospective lenders should spend time educating themselves on the different options that are available to ensure that they choose the one that’s best suited to their needs. One of the key decision points when it comes to taking out a personal loan is whether to take out a secured or an unsecured loan.

What’s the difference? Let’s go into a bit more detail:

1.) The aptly named “secure loan” provides the institution lending the money with security in the form of collateral, normally the person’s house or asset of similar value. Secure loans will allow the lender to secure finance at a lower interest rate and usually over a longer period because they’ve offered an asset as assurance that they will pay back the agreed amount. For this reason, borrowers are also likely to be approved for a larger loan. The obvious disadvantages with this option is that in the event that they run into trouble or default on a payment, the lending institution can legally claim the asset (which in most cases will be the persons home) to cover the money that’s owed.

2.) An unsecured loan allows the borrower to lend money (usually a smaller amount) without providing any form of collateral and it’s generally much harder to get approval for an unsecured loan because of this. Interest rates will be higher than on secured loans because the institution providing the finance has no assurance (in the form of an asset) in the event that the borrower defaults on their payments. The lack of collateral also means that the person requesting the loan is only likely to be approved for a much smaller amount.

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In both instances the interest rate you’ll be charged will depend on factors such as:

*Credit history (If the applicants credit history is a bit “greyed” then they’re more likely to be approved if they apply for a secured loan because the lending institution has an asset as backup)

*Current level of income

*Existing debt

Secured loans will normally be taken in instances such as business related loans and home extensions or renovations, whereas unsecured loans will usually be considered for smaller personal loans. Some people opt to take out a personal loan instead of using their credit card because it allows them to pay the loan back over a longer period and at a lower interest rate.

For individuals that have multiple accounts at differing interest rate, consolidation loans, whereby a larger loan is taken out to pay off all the smaller ones, results in one monthly repayment and can provide an effective way to gain control over debt.

This article was written by Jolly_Roger who is an avid gamer, occasional surfer and loves the outdoors.

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