Each time you try to borrow cash from a financing entity or another individual, you are taking out a loan. There are some cases when you only need to pay back the loan back as agreed, but there are also instances when you need to present some sort of security to obtain the loan. The first statement is true for unsecured loans, while the latter defines secured loans. Before you take out one of either, you need to brush up on secured vs unsecured loans.
What’s difference between a secured and unsecured loan?
First, a secured loan requires a security, otherwise known as collateral, in order to qualify for the loan. The collateral secures the loan, so that when you fail your payment obligations or default, the lender has some sort of leverage to use against you. The lender feels secure about lending money to you and you’re seen with lesser risk to default because you’re most likely to pay the loan up than lose your collateral.
Losing Collateral? What Does This Mean?
The most common forms of collateral are homes, vehicles, jewelry and investment certificates. The lender has the right to foreclose your home or seize your vehicle when you default on your loan. He may sell it to cover the unpaid loan amount, and you can still be held liable for the difference should the amount of the collateral is unable to cover the overall cost of the loan.
Therefore, when you default or become negligent of your secured loan, you could end up losing your asset and paying more.
Are Unsecured Loans Better?
So now you might wonder: is it better to go for unsecured loans instead? The answer depends largely on your financial circumstances and whether or not you’re willing to provide collateral. Unsecured loans, are, like the phrase implies, unsecured. It means that you wouldn’t have to present collateral to obtain such loan.
However, in place of collateral, the lender can impose higher interest rate. This allows them to generate more profit from doing business with you and bring down at least some of the risks associated with your collateral-less loan application. If you’re borrowing unsecured loans, you would want to keep your end of the bargain in order to not incur any more fees and charges.
Some people also opt for unsecured loans even if they have collateral to provide just to stay away from the risk of getting their assets repossessed. If you’re willing to pay a higher loan cost and secure your home or vehicle, then an unsecured loan is the best option.
What about Credit Report and Standing?
In most cases, lenders of both secured and unsecured loans do report to the credit bureaus. This can be good or bad for you, depending on how you manage your loans.
For one, if the lender reports to the credit bureaus and you’re never late with your payments, then that’s plus points for you. Over time of paying back your loans in a consistently timely manner, your credit score will improve as well. Some people who are in the red with their credit scores and can’t avail a credit card at the moment do use loans as a great stepping stone. Getting a loan helps them build, maintain and increase credit score.
However, if you neglect the payments, your credit score could suffer. In case you took a secured loan and defaulted, a foreclosure in your record could further stain your credit history. But regardless of the type of the loan, you want to make sure that you’re able to pay the loan back responsibly to keep your credit score from dipping down.
What is the Best Option?
There is no standard answer to this question simply because our circumstances are different from one another. However, here are some scenarios that can help you make a wise decision.
A secured loan is best for people who have assets to show and desire higher lending limit and lower interest rate. Since you have collateral to provide, the lender feels more confident about lending a larger amount or bringing down the interest rate or both. However, you do need to inquire about the lender’s processing speed particularly if you need the loan in a hurry. Some lenders do take a couple of days to provide approval since they have to verify that you’re the true owner of the asset provided.
On the other hand, an unsecured loan is a good option if you don’t have collateral to provide, don’t want to risk your assets and if you need the loan right away. A lot of lenders offering unsecured loans can process loan applications within the same or the next business day. At the latest, you should be able to obtain the loan in the next 24 hours after approval.
Additionally, an unsecured loan is ideal for people who don’t have collateral to provide. If you don’t have a home yet and are only renting a property, you can take unsecured loans. Or, if you’d rather stay on the safe side and protect your investment, this loan is best for you.
What matters the most between secured vs unsecured loans is that you are financially capable of paying it back. You must remember that your asset is at stake here. Or, in the case of unsecured loan, continuous non-payment of the loan can dig you deeper into debt, which in turn, will breed nastier financial complications.
Secured vs Unsecured Loans Recap
Taking out a loan from a financial entity is a legally binding process. This means that when you present something as collateral or security and you fail to perform your duties as borrower, the lender is within law to seize your asset. You cannot contest this as this is what you signed up for. Or, the interest can add up in your loan, making it balloon to a larger amount.
It therefore takes a lot of careful consideration when you’re contemplating about taking out a loan. Whether you want to take a secured or unsecured loan, you need to consider the benefits and risks properly, ensuring that the pros far outweigh the cons.
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