Secured & Unsecured Personal Loans

Secured & Unsecured Personal Loans

A secured loan is a loan that is guaranteed by an asset. The asset is usually a collateral whose value determines the loan amount and the terms of the loan (interest rate, fees, amortization period and etc.). The more common types of secured loans are home loans, home equity lines of credit and auto loans. A secured personal loan lender could use anything from personal belongings such as your gold watch to major assets such as your house as a collateral.

Secured loan lenders are exposed to a much lower borrower default risk than unsecured lenders. If the borrower defaults and or falls behind on a secured loan payment, the lender will foreclose or reposes the collateral. If a borrower of an unsecured loan fails to make payments, the lender will simply have to take a hit.  Which explains the higher interest rates and lower loan amounts with unsecured personal loans.

An unsecured loan could come in many forms and it doesn’t have to be in cash form as offered by the personal loan lenders on For example, even your credit card is an unsecured loan.  The issuer is simply granting you credit based on your income, credit and employment history. If you don’t or can’t repay your credit card debt, their options are limited. Basically, they can report you to the credit agencies and make it more difficult for you to obtain financing in the future. They don’t knock on your door asking for the sofa or the shoes you purchased.

Another form of an unsecured loan is a debt consolidation loan.  A lender will review your credit, payment history and debt to see if a new loan will put you the borrower in a better financial position.  If yes, they will offer a debt consolidation loan.  The theory behind this is that if the borrower’s overall monthly payments are lowered, the borrower will continue to make good on their obligations.  The major advantages to borrower are lower payments and freed up credit. The freed up credit and higher available revolving credit generally tends to improve your credit score too.

26 November 2016 , , , , , , ,

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