What is a Secured Loan?

A secured loan is a loan given out by a financial institution wherein an asset is used as collateral or security for the loan. For example, you can use your house, gold, etc., to avail a loan amount that corresponds to the asset’s value. In the case of a secured loan, the bank or financial institution that is dispensing the loan will hold on to the ownership deed of the asset until the loan is paid off.

 In other word, Secured loans are protected by an asset. The item purchased, such as a home or a car, can be used as collateral. The lender will hold the deed or title until the loan is paid in full. Other items can be used to back a loan too. This includes stocks, bonds, or personal property.

Secured loans are the most common way to get large amounts of money. A lender is only going to loan a large sum with promise that it will be repaid. Putting your home on the line is a way to make sure you will do all you can to repay the loan.

Secured loans are not just for new purchases. Secured loans can also be home equity loans or home equity lines of credit. These are based on the current value of your home minus the amount still owed. These loans use your home as collateral.

A secured loan means you are providing security that your loan will be repaid. The risk is if you can’t repay a secured loan, the lender can sell your collateral to pay off the loan.

Secured loans offer some pluses over unsecured loans:

• lower rates
• higher borrowing limits
• longer repayment terms

Examples of secured loans

1. Loan against property
2. Home equity line of credit
3. Car loan
4. Mortgage
5. Home Equity Line of Credit
6. Auto Loan
7. Boat Loan
8. Recreational Vehicle Loan

What is an Unsecured Loan?

Unsecured loans, like the name suggests, is a loan that is not secured by a collateral such as land, gold, etc. These loans are comparatively riskier to a lender and therefore associated with a high

Interest rate. When a lender releases an unsecured loan, he does so after evaluating your financial status and assessing whether or not you are capable of repaying your loan.

Unsecured loans are the reverse of secured loans. They include things like credit cards, student loans, or personal (signature) loans. Lenders take more of a risk by making this loan, because there is no asset to recover in case of default. This is why the interest rates are higher. If you’re turned down for unsecured credit, you may still be able to obtain secured loans. But you must have something of value that can be used as collateral.

An unsecured lender believes that you can repay the loan because of your financial resources. You will be judged based on the five C’s of credit:

• Character
• Capacity
• Capital
• Collateral
• Conditions

These are yardsticks used to assess a borrower’s ability to repay the debt. Conditions include the borrower’s situation as well as general economic factors.

Examples of unsecured loans

1. Credit cards
2. Personal loan
3. Personal Lines of Credit
4. Student Loans. Tax returns can be garnished to pay unpaid student loans
5. Some Home Improvement Loans

Is a Secured Loan Better than an Unsecured Loan?

Apart from being easier to obtain, the contract on a secured loan is usually more favourable for a borrower than an unsecured loan. Often times, the repayment periods are a lot longer, the interest rates are lesser, and borrowing limits are higher. All these factors imply that opting for a secured loan is more beneficial for a borrower.

Ever lenders prefer secured loans over unsecured loans as they are less risker to dispense. Since borrowers have to provide an asset as collateral to obtain a secured loan, there is a degree of certitude in the mind of the lender. The lender is assured to get back the money loaned out, and even if he doesn’t the asset can be used to recover the loss of non-payment.

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