Difference Between Secured and Unsecured Loans
Choosing the wrong repayment plan will only worsen your financial status, and before you know it, you might end up with more debts. How do personal loans work? To make the smartest decision, you should learn the difference between secured and unsecured loans, then figure out which suits you best.
In this article, we’ll let you in on all the details you need for going in the right direction.
What’s The Difference Between Secured and Unsecured Loans?
There’s more than just one difference between these two types of loans, the most basic of which is the definition. Can you get multiple payday loans at once? Learn more here.
What Does a Secured Loan Mean?
As the name implies, a “secured” loan is one that comes with “security” to the lender. It’s connected to something that you own, usually a car, mortgage, or any other asset that the lender can take possession of if you failed to repay them.
What Does an Unsecured Loan Mean?
On the other hand, Unsecured loans rely on the strength of your cash flow rather than your actual assets. You don’t need to provide any information about your properties or inventory. What is a loan? It is when you borrow money and need to repay it back.
Secured Loans vs. Unsecured Loans
Now that you understand what’s meant by each of these terms, let’s take a closer look at the differences that come with applying for both loans. Learn how to calculate interest on a loan here.
As mentioned earlier, these approved loans are connected to collaterals; accordingly, they tend to have lower interest rates and higher funds.
However, with a secured loan, the borrower has to prove the purchase of their asset and provide some additional documentation of their belongings. This makes the approval process longer than expected. Also, keep in mind that the bank may require reassessing the current value of your house, car, or whatever you choose to get the secured loan against.
By now, you’re probably wondering whether the borrower gets the same value as their asset or not, and the answer is: No, they don’t. If your car is worth 50k AUD, it doesn’t mean that the lender will give you the same amount of money.
Because unsecured loans don’t depend on a physical asset, they allow the borrower to get hold of smaller amounts. It’s pretty understandable when there’s no collateral for security, so the lender can’t be 100% sure you can repay them; thus, these loans are deemed riskier as it means the borrower is more likely to default. What is defaulting on a loan? It is when a person does not repay what they have borrowed.
In addition, these loans have higher interest rates, yet, they can be the best option in many circumstances. Learn how to work out interest on a loan here.The good thing is, unsecured loans are much faster to obtain because you don’t go through the hassle of upfront information. Hence, they’re considered quick access if you need an immediate fund.
What Happens If I Failed to Make My Payment On Time?
As far as you’re concerned, you’ll lose your collateral if you fail to repay a secured loan, but what would happen if you defaulted on an unsecured loan? How long to pay off loan? This will be arranged as you get the loan itself, and can vary.
In this case, your credit report will take the hit. If you’re more than 30 days late on a payment, your credit score will decrease, and the lender has the right to report to a debt collection agency.
Which Personal Loan Is Better for Me?
Choosing the best lending option for your business depends on your situation. In general, secured loans are easier to approve because the lender is sure they’ll be getting back their money one way or another. Moreover, it makes sense to choose the option with the lower interest rate if you have some financial difficulties. This is why you should learn how to pay your loan off faster.
In reference to what’s been said, secured loan approval process sound like a better option. However, you should consider what’d happen if you failed to meet the agreement. Losing your car isn’t as bad as losing your home, at least you won’t be living on the street.
Unsecured loans are faster to get, so you can settle your finances quicker. Yet, you should check if the amount of money you’ll be getting is enough for you to sort things out. And again, you need to think about the risk you’ll be taking. You wouldn’t want to ruin your credit profile as it’d only make things worse. What do I need to apply for a personal loan? See our checklist here.
So, before you decide to get an unsecured loan, make sure to have a backup plan that you can turn to if things go wrong and you have to default. Can you get a loan with a paid default?
To sum it up, you should think about the amount of money you need, how fast you need it, the consequences of losing your asset, the interest rates, and whether you’ll be able to make your payments on time before choosing between a secured and an unsecured loan. Once you figure these out, you can make an informed decision about which of these loans is the best option for you.