Loans fit into one of two categories: Secured and Unsecured. Before making any applications to loan money, it’s important that you understand the differences between these two types of loan.
In this article we explain how a secured loan and an unsecured loan differ from one another, describing the way they work, their popularity and safety.
What’s the difference between a secured loan and an unsecured loan?
A secured loan is one that’s tied to an asset such as a house or a car. These assets are commonly referred to as ‘collateral’, and can be repossessed by the lender if you fail to keep up with the loan repayments agreed when you took out the loan.
Unsecured loans on the other hand unsecured loans are not protected by any collateral, meaning that the lender can not take any of your assets if you default on your loan payments.
How do secured loans work?
Secured loans are often issued for a specific item of property, such as a mortgage for a house or a car loan. During the loan period, the lender owns the asset the loan is for. Only when the loan is fully repaid does the asset become your own.
How do unsecured loans work?
Unsecured loans are not based on a specific asset, instead they’re centered around your ability to repay the loan. Therefore details of current and previous employment, credit scores and savings are often required when applying for this type of loan. Popular types of unsecured loans are student loans and credit cards.
Are unsecured loans safe?
As the graph below shows, more people are searching online for loans than ever before. So it’s important to know exactly what you’re getting yourself in for when you do borrow money.
Unsecured loans are often viewed as being less risky than secured loans, as your lender will not be able to take any collateral from you if you do not keep up your payments. For this reason, unsecured loans are often more expensive than secured loans with higher interest rates.
If you do not keep up with regular payments on your unsecured loan, this may result in extra charges which can also damage your credit score. Therefore there is an element of risk involved with unsecured loans.
As you can see from the graph, the number of monthly searches for ‘How to get a loan’ has increased significantly over time.
Pros and Cons of Secured versus Unsecured loans
The table below shows the advantages and disadvantages of Secured and Unsecured loans.
We hope this article has been useful in providing you with an overview of the differences between Secured and Unsecured loans. We hope it’s helped you to make sure you’re fully prepared if you’re considering taking out a loan at some point in the future.