Before applying for any loan it is important to understand the differences between secured and unsecured loans. Depending on your current financial situation, one type of loan may suit you more than the other. Through a basic understanding of the differences between secured and unsecured loans you are in a better position to determine which type of loan is better for you.
A secured loan is one which is ‘secured’ against some of your owned property. Usually, this will be a home that you own. However, other possessions such as cars may also be used as security. With a secured loan the lender has the right to sell the secured property (often called collateral) in the event that you default on the repayments. They must first send a notice of default before they are legally able to sell your property (the requirements of this vary in each state so check your local laws). As you can see, the main drawback of secured loans is that you risk losing your property if you are unable to make the repayments. However, the advantage of secured loans is that they have much lower interest rates and fees as they are ‘safer’ loans for the financial institutions. You will also be able to borrow considerably more as the lender knows they can recover the money in the case of default.
Unsecured loans have much higher interest rates and fees than secured loans as they are considered ‘risky’ loans. No property is ‘secured’ so the lender has no right to sell any of your possessions to recover their debt. The main advantage is the reduced risk of losing your home. However, the repayments will be much higher and you will not be able to borrow as much money from the lender.
