Secured Loans Vs Unsecured Loans
Loans fit into one of two categories- secured or unsecured. A secured loan is
simply any loan that has some collateral attached to it, such as a car or house. An
unsecured loan is any loan without collateral attached. We’re going to go a little
further in depth on these two types of loans and what makes them different.
Every Loan Is Secured
Even if there is no property or collateral involved in the loan, every loan has some
level of security to it. There is some sort of credit that makes the loan of
reasonable risk to the lender. For unsecured loans, that is the borrower’s
creditworthiness. That simply means that the borrower or loan applicant has
good enough credit or a steady enough income that the lender is satisfied that
they will be able to pay back the loan on time. Now, the lender has no guarantee
that the loan will be paid back, and they don’t have anything tangible to secure
the loan with, but the loan does have a level of security to it.
Secured loans, of course, are backed by actual possessions. In most cases, it is a
house or vehicle, but property or some other sort of valuable possession will also
work. The lender has to agree to the value of the item, and they are given either
possession of the item or the deed or title for that possession until the loan is
What Happens When the Loan Contract Is Breached
If the borrower does not pay back the loan on time, they may be issued a warning
by the lender. They may be given several chances to repay the loan, even after
they have failed to make a payment on time. However, there will come a time
when the lender is tired of waiting for repayment and will seek legal recourse.
For a secured loan, their recourse is simple. They take or keep possession of the
secured collateral. They may have someone come collect a vehicle or they may
force the lender to move out of their house. Either way, the secured item is now
theirs to do with as they wish.
For an unsecured loan, the lender will have to find another way to get their
money back. They will generally have to take their case to a court, where the
judge may force the borrower to give up some of their possessions or sell
property in order to repay the loan. There may also be fines attached to not
paying the loan back on time and for taking the matter through the court.
The Cost of the Loans
Secured loans are not very risky for the lender. They know that if the borrower
defaults on their loan, they can simply take possession of what is promised to
them in such cases. It is a simple and clear cut matter legally, so it poses few
complications for them should the need arise to get what they are owed outside
of normal payments.
When it comes to unsecured loans, the risk is much greater for the lender. It can
be more difficult and time consuming for them to get what is owed them. That
generally means they will take measures to ensure they get at least some money
back along the way. You will find that unsecured loans tend to have higher
interest rates than secured ones. The lender uses those higher rates to make up
for the level of security that is lost to them by providing an unsecured loan.
How Widely Available Are They?
Consumers should have little trouble finding either secured or unsecured loans,
but not all lenders will provide both. For payday loans and other high-interest,
short-term loans, unsecured loans are the norm. These are small loans that are
meant to be paid back quickly, so there usually isn’t any need to take out
collateral. These loans are designed to have high interest rates already built in,
which means they are idea for the unsecured loan setup.
Typically, you will find both secured and unsecured loans through banks, and it
may be easier for someone with bad credit to take out a secured loan there, as
their credit should not be as much of an issue then.
Essentially, what kind of loan is available to you will depend on where you look,
what you have to put forward as collateral and what your credit rating is.