While some individuals swear to use only cash for daily living, the truth is that most of us depend on credit to pay for big expenses. Let’s say you want to purchase a car or a house, start a business, remodel your home or pay your college fees; you may apply for a loan to cover the expenses.
When considering the credit options, you’ll have to decide between unsecured and unsecured loans. However, you must know how these two loan options are different. Depending on your financial capabilities and situation, you can choose the loan that suits your needs.
What are Secured Loans?
These loan options require a valuable asset as collateral. Usually, they are large amounts you can use to buy land or run your business. Lenders only lend large amounts on the assurance that it will indeed be paid back in full and on time. By pledging your home as collateral, you show commitment to repay the debt in full.
Nonetheless, should you fail to meet the loan terms required by the lender, the lender has the right to sell any assets used as security and use them towards reimbursement for your loan.
Secured Loans Come in Many Types as Mentioned Below:
Vehicle loans: If you want to purchase a new car or even an entire fleet of cars for business use, you can get a vehicle loan to use. All that’s required after that is keeping up with consistent payments until it’s paid in full. However, should you fail to make your payments on time, the bank will have no option but to repossess and sell the car to recoup their investments.
Mortgage loans: They are secured against the home or property that is being purchased. In the event of payment default, however, lenders can reclaim ownership of the asset.
Benefits of Secured Loans
Low rates: By attaching collateral as security, the risk for banks is minimized, allowing them to offer loans with relatively low-interest rates.
High loan amount: For secured loans, the loan amount will usually match the value of assets pledged. Therefore, borrowers can get a higher amount when taking an unsecured loan.
Longer repayment period: Since the risk on these loans is lower, banks allow the repayment terms to be negotiated, considering the lifespan of your collateral asset.
What’s an Unsecured Loan
Unsecured loans are Instant cash loans within hours that do not need collateral and are the simplest when applying. You can get the funds from any bank or financial institution and make regular payments until it’s fully paid off with interest.
Unlike secured loans, unsecured loans involve greater risk as there is no collateral that can be recovered in case you fail to pay. Examples of such loans include credit cards and student and personal loans at higher interest rates than their secured counterparts. If you are declined an unsecured credit line, you may still qualify for a secured loan, provided you have something valuable to use as collateral.
The lender will assess your chances of repaying the loan based on the five C’s of credit: Character, Capacity, Capital, Collateral, and Conditions. Your character includes your credit score along with employment history and references. Whereas capacity is related to income and current debt, and capital consists of money saved in accounts, collateral refers to personal assets put up as security, such as a house or vehicle.
The lender uses these determinants to gauge a borrower’s capacity to settle the debt. Besides, the borrower’s situation is also considered, not forgetting the economic factors.
Unsecured loans are the way to go when there is a need for short-term borrowing. Offering you flexibility and repayment options, here are types of unsecured loans:
Personal Loans: This loan type will give you access to funds when liquidity isn’t available for financing your dream vacation or wedding expenses.
Account Overdrafts: A bank allowing up to a certain limit more than your current balance should cover any emergency needs.
Benefits of Unsecured Loans
Convenience: Unsecured loans are the way for those seeking to borrow small money. Not only are they convenient, but they pose less risk for borrowers as there is no requirement for collateral.
Faster processing: Unsecured loans are incredibly swift to process since there is no collateral evaluation, as is the case for secured loans. Your credit score and history can be quickly evaluated, and a decision will be made within a day or even hours in some cases.
Let’s compare the interest rates of unsecured loans vs. secured loans:
Unsecured Loan Vs. Secured Loan: Interest Rates
Secured loans come with lower interest rates than unsecured loans since they have collateral. They have interest rates ranging from 8-15%. As for the unsecured loans, there is no collateral, making them riskier and thus high rates. The rate you get will depend on the lender and credit score but usually falls between 10% and 36%.
Those with excellent credit history may be able to find short term loans that offer competitive rates similar to those of secured loans. It’s essential to shop around and compare different loan offers before committing to one to get the best deal possible.
Keep in mind that secured loans may offer lower rates but come with the risk of repossession if you cannot make your payments. Ultimately, it’s up to you to decide which type of loan is right for your financial situation.