SECURED LOAN AND UNSECURED LOAN

Loan is referred to a sum of money borrowed from bank or financial institution for a particular period, that requires repayment along with interest. These days, loans are considered as the best means of availing finance for any purpose like education, construction of a house, purchasing the car or any other business requirement.

There are two types of loan, namely, secured loan and unsecured loan. When a loan is secured the borrower pledges some asset as security against the loan. On the other hand, an unsecured loan is one that is backed with the borrower’s creditworthiness and paying capacity. these are issued to promorters, so as to fulfill promorter’s contribution norm. In this article, we have compiled all the necessary differences between secured loan and unsecured loans. It can help you to decide, that which loan is best suited as per your needs.

SECURED LOAN

A secured loan is a loan backed by collateral. The most common types of secured loans are mortgages and car loans, and in the case of these loans, the collateral is your home or car. But really, collateral can be any kind of financial asset you own. And if you don’t pay back your loan, the bank can seize your collateral as payment. A repossession stays on your credit report for up to seven years.

When you take out a secured loan, the lender puts a lien on the asset you offer up as collateral. Once the loan is paid off, the lender removes the lien, and you own both assets free and clear.

Here are the kinds of assets you can use as collateral for a secured loan:

• Real estate
• Bank accounts (checking accounts, savings accounts, CDs and money market accounts)
• Vehicles (cars, trucks, SUVs, motorcycles, boats, etc.)
• Stocks, mutual funds or bond investments
• Insurance policies, including life insurance
• High-end collectibles and other valuables (precious metals, antiques, etc.)

 

Secured credit cards, such as the Capital One Platinum Secured Credit Card and the Platinum Secured Mastercard from First Tech Federal Credit Union , are another example of a secured loan. The collateral, in this case, is the cash you put down (often a Rs. 20000 refundable deposit) that acts as your initial credit limit. You get your deposit back when you close the account.

Because your assets can be seized if you don’t pay off your secured loan, they are arguably riskier than unsecured loans. You’re still paying interest on the loan based on your creditworthiness, and in some cases fees, when you take out a secured loan.

Example:

Mortgage – A mortgage is a loan to pay for a home. Your monthly mortgage payments will consist of the principal and interest, plus taxes and insurance

Auto Loan – An auto loan is an auto financing option you can obtain through the dealer, a bank, or credit union.

UNSECURED LOAN

Unsecured loans are the reverse of secured loans. They include things like credit cards, student loans, or personal (signature) loans. Lenders take more of a risk by making this loan, because there is no asset to recover in case of default. This is why the interest rates are higher.

If you’re turned down for unsecured credit, you may still be able to obtain secured loans. But you must have something of value that can be used as collateral.

An unsecured lender believes that you can repay the loan because of your financial resources.

Character – can include credit score, employment history, and references

Capacity – income and current debt

Capital – money in savings or investment accounts

Collateral – personal assets offered as collateral, like a home or car

Conditions – the terms of the loan

Example:

Credit Cards – There are different types of credit cards, but general credit cards bill once a month and charge interest if you do not pay the balance in full.

Personal (Signature) Loans – These loans can be used for many purposes, and can vary from a few hundred to tens of thousands of dollars

Differences Between Secured Loans and Unsecured Loans

1. Another key difference between a secured and unsecured loan is the rate of interest. Secured loans usually have a lower rate of interest when compared to an unsecured loan. This is because unsecured loans are considered to be risker loans by lenders than secured loans.
2. Secured loans are easier to obtain while unsecured loans are harder to obtain, as it is less risker for a banker to dispense a secured loan.
3. The borrowing limit is high in the secured loan which is comparatively low in case of an unsecured loan.
4. In secured loans, the asset is pledged whereas there in no pledging of assets in case of unsecured loans.
5. The risk of loss is very low in the secured loan in comparison to an unsecured loan.
6. In Secured loan interest rates is low as compared to unsecured loans
7. In secured loan the loan amount is very high as compare to unsecured loan