A personal loan is a very useful financing support when purchasing a product for personal use such as a car or a property.
If you decide to talk with different agents for a suitable loan product, you will likely encounter the terms secured loans and unsecured loans. You will also need to choose which one is the better option for your current situation, so it’s necessary to know the difference between the two.
What does security mean in loans?
Security refers to the guaranteed status of the lenders to recover whatever financial loss they might get if the loan payment is not completed. Rights over any valuable asset are pledged to the lenders, which enables them to sell that asset and get back their money.
What is a secured loan?
A secured loan requires the borrower to grant the lender access to an asset. The asset could be an existing property or the one that the lender is buying out of the loan. It will be the collateral for the lender against any unpaid amount left by the borrower.
If the value of the asset does not compensate the remaining loan amount, the borrower will still owe to the lender whatever the difference is. With secured loans, lenders are able to offer more attractive interest rates and loan terms because of the secured asset.
How is an unsecured loan different?
There is no guarantee for the lender to recover any possible loss in the loan agreement. The borrower will provide no security asset, which is why it is much riskier for the lender. The interest rates for unsecured loans are generally higher than secured loans because of this risk.
If you want an unsecured loan that has a lower interest rate then go for a guarantor loan. Here, a family member or a friend with a better credit history will agree to do the loan repayments if the borrower fails to do so. The lender will have more security on the loan agreement so you can negotiate to have a lower interest rate.
How do I know which loan to get?
If your reason for getting a loan is to purchase an asset like a car, land or certain machinery, then it is best to get a secured loan. This way, the asset that you are purchasing can be the security for the lender.
On the other hand, an unsecured loan is more suitable if you are borrowing smaller amounts of money. The purpose of the loan could be for home repair, home improvement, credit card debts, or payment for other lines of credit, although some banks may offer unsecured loans for a car purchase.
Secured and unsecured loans have their own advantages and disadvantages. Now that you know their differences, you can choose the right one that is applicable to your financial situation and the purpose of your loan.