Borrowing basics secured vs unsecured loans

Friday, 05/06/2015

A loan can help you do many things: buy a new car, jet off on holiday or pay for household renovations. But falling into red is easier than you think. Fees, charges and interest rates can make a loan expensive, especially when you accidentally choose the wrong loan for your needs. To stay in control of your finances, you must take the time to understand the differences between the two categories that almost all loans fall into: secured and unsecured.

Secured loans

When you take out a secured loan, you must pledge something of value that you own, for example, your home or car, to the lender. This item, known as collateral, serves as protection for the lender as the lender will have the right to sell it and apply the proceeds to your outstanding debt without going to court in the event that you fail to meet your loan repayments.

With a secured loan, you usually pay a lower rate of interest than with an unsecured loan. However, you run the risk of losing one or more of your personal possessions if you fail to repay the lender.

Unsecured loans

An unsecured loan differs from a secured loan in that it does not require you to pledge something of value that you own to the lender. Such a loan is usually harder to acquire as you must convince the lender that you have the means to repay the loan. The better your credit rating, the better your chances of securing an unsecured loan.

With an unsecured loan, you usually pay a higher rate of interest than a secured loan as the lender faces a higher level of risk. If you fail to keep up with your repayments, the lender will have to take you to court in order to recoup your outstanding debt.

Weighing up your options

Secured and unsecured loans can differ considerably between loan lenders, so it is important that you have a clear understanding of the benefits and drawbacks of the type of loan you choose to take out. You should examine the terms and conditions of the loan in detail, ensuring that you will be able to repay the lender in full without straining your budget.

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