In financial affairs, when lending of money takes place between one or more organizations, entities, or individuals to another individual or organization, it is called a loan. Before applying for credit, you must have a detailed and accurate knowledge of different types of loans, their interest rates, and which loan is reliable and best. So, in this article, we will discuss everything in detail about the secured loan and unsecured loan.
What is a Secured Loan?
Secured loans are the loans where the borrower guarantees assets like property, vehicle, etc. as collateral for the loan and thus the creditor lending the loan has a secured debt owed Here, the creditor stays relieved from the financial risks by borrowing the loan through secured debt.
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Example : Mortgage, Car Loan, etc.
What is an Unsecured Loan?
Unsecured loans are those where the loan is not secured or guaranteed against assets like a vehicle, etc. instead is issued to the borrower only on his or her trustworthiness. In some scenarios, the creditor may agree to give loan to the applicant with deficit credit, but with a co-signer who has to pay back the debts in case the loan applicant fails to pay it on time along with the interest rate.
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Example ‘“ Credit cards, Student loan, etc.
Comparing Secured Loan and Unsecured Loan
- Unsecured loans have higher interest rates and high credit scores, whereas, secured loans have lower interest rates.
- The borrowing limit is higher in a secured loan compared to an unsecured loan.
- In secured loans, the creditor gains total ownership on the collateral in case the borrower fails to repay whereas, and unsecured loans are collateral-free.
- In finance, the risk factor is more in unsecured loans than that of secured loans.
Which one to choose?
It is good to choose a secured loan as it offers lower interest rates than unsecured loan making it a better choice for customers with a tight budget.
It is ultimately an individual’s choice to opt for any loan based on their need for credit. Considering the risk factors, security, time limit, interest rates, you can decide whether to prefer a secured loan or unsecured loan.
Read Also: Signature Loan Basics: A Quick Guide to Unsecured Financing
