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Secured and Unsecured Loans

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Introduction to Secured and Unsecured Loans

People searching for loans often forget that a loan is a product, and products have many characteristics: type, origin, a certain target and many more. Like any other time you plan to purchase something, first learn the essential things about the product. That way you will end up purchasing a better product and saving money.
The main characteristics of a loan are: type of loan, the loan period (or life), loan rates, loan terms. Loans divide in two categories: secured and unsecured loans. The main difference between them is represented by the collateral. Secured loans require a collateral, while unsecured do not.

Secured loans

A secured loan must be backed up by some asset belonging to the applicant. This can be represented by a house, a car, real-estate, jewelry. The collateral is meant to reduce the risk for the lender. In case the borrower fails to make the repayment (defaulting), the asset will be forfaited to the lender. Because the risk is reduced, secured loans make available greater amounts of money. Secured loans are usually given for periods between 10 and 30 years, and rates are smaller compared to unsecured. Some examples of secured loans:

Home Equity Loan

Auto Loan

Boat Loan

Home Improvement loan

Pros and cons of secured loans

Pro:

easier to get approved;

provide large amounts;

you can negotiate better terms and rates;

comfortable monthly payments

Cons:

you risk losing your asset (house, car);

long repayment period;

Unsecured loans

Unsecured loans do not require a collateral. However, because the loan is not secured by a property or asset, it's much more difficult for the lender to recover his investment if the borrower fails to repay. The borrower's financial reputation will weigh heavy in getting his application approved. The current income will determine the amount, while the rates tend to be fixed. Given the different guidelines and rules, you can expect to be offered different amounts from different lenders. Some examples of unsecured loans:

personal unsecured loans;

unsecured business loans;

Benefits and disadvantages of unsecured loans

Plus:

No need for collateral

Minus:

can be difficult to get;

provide small amounts;

bigger rates;

less flexibility;

fixed payments;

Last words

Before you apply for a secured or unsecured loan, calculate a budget to make sure you can repay. If you don't know how, you have an example here. Consider an insurance for unexpected events (accidents, illness, etc). Don't settle for any insurance offered by the lender, because it can be expensive and deprive you of some advantages. You can get a quote from an independent financial adviser.