When you borrow money from a bank or even a person, you are essentially taking out a personal loan.
The lender that is offering you the loan will agree to let you borrow their money with only your promise to repay it back.
Alternatively, the lender can demand that you use an asset as collateral for the loan. Thats the fundamental difference is between secured and unsecured loans.
What Are Secured Loans and How Do They Work?
Secured loans are personal credit that are secured by putting up an asset against it, such as a home in the case of a mortgage loan or a vehicle in the case of an auto loan.
This asset serves as the loan’s collateral and when you take the loan, you understand that the lender has the right to repossess the collateral if you do not repay the loan on time.
If you default on a secured loan, lenders will take custody of your asset such as your house, but you will still owe money on the loan. In such a case the Lender will auction your repossessed property and use the proceeds to pay off the debt.
You would still be liable for the difference if the property does not sell for enough money to fully repay the loan.
What Are Unsecured Loans and How Do They Work?
In the case with an unsecured loan, this is not the case. An unsecured debt is not backed with any of your collateral, and the lender cannot take your property to repay the loan.
Personal and student loans are examples of unsecured loans because they are not backed by any asset that the lender will seize if you default on your payments.
To be eligible for an unsecured loan, you usually need a good credit history and a steady salary.
Since the lender has no collateral to take if you default on loans, loan sums will be lower.
Why Do You Get a Secured Loan?
With the prospect of getting your property seized if you do not repay the loan, you might be wondering why someone would want a secured loan.
People often prefer secured loans because their credit history prevents them from obtaining an unsecured loan.
Lenders are less likely to lend you a loan because secured loans are backed by collateral.
Some loans, such as a mortgage or car loan, will not be accepted unless the lender has permission to take possession of the property if you default.
Borrowers who take out secured loans may also get accepted for larger loan amounts. And if you qualify for a larger loan, you must be selective in choosing a loan that you can afford.
When it comes to secured loans, the interest rate, maturity duration, and monthly payment installments are all essential considerations to take into account.
