What is a secured loan?
A secured loan is a term which is used to refer to that particular loan in which an asset is used as a security or collateral. It can be given by any financial intuition. The rate of interest is less. In the secured loans, since the borrower gives one of his important assets to the lender, it becomes easy for the lender to give the loans as they are not at much risk. If in case the borrower is unable to return the money their borrower the lender can legally declare their ownership on those assets that was initially given by the borrower. Example of the secured loans is loan against property, home equity line of credit, car loans, etc.
What is an unsecured loan?
Now the unsecured loan is a term used to refer to that type of loan in which the lender gives the loan to the borrower but in turn it does not take any kind of collateral or security like land, gold etc form the borrower. But here the rate on interest is very high. Also providing an unsecured loan is a little complicated process. Since in this case, no security is provided, the lender wants to make sure that whoever he is lending money has potential to returns the loans. These loans are considered a little risk and therefore a lot of evaluation is done in terms of the financial health of the borrower and after assessing whether they are capable of paying back the loan or not, the deciding of giving them the loan is taken. The example of the unsecured loans is credit cards, personal loans and student loans.
What is the difference between both the two types of loans?
The difference between the two is as follows-
- On one hand where there is no collateral required in the unsecured loans; in the secured loans the collateral is required. Thus one does not need to provide an assets at the time of boring an unsecured loans, but if that is going for a secured loan they will need to provide an assets such gold or a land etc.
- The rate of interest matters too. In the case of the secured loans since collateral are there, the rate of interest is comparatively less as compared to that of the unsecured loans in which the rate of interest is higher.
- The unsecured loans are considered to be more risky as compared to the secured loans due to the lack of assets at time of borrowing loan.
- It is easier to obtain a secured loan than the unsecured loan as it is less risky for any financial institution to dispense a secure loan.
- The repayment periods of the secured loans are generally longer as compared to those of the unsecured loans. Thus one who is issuing secured loans gets to have a more desirable contract than the one who is taking an unsecured loan.
Thus both the two loans are meant to lend money to people who need it but the only major difference is that one requires collateral and the other one does not.