The moment you decide to search for a loan, you will either go out for a secured or an unsecured loan. These are the two major types of loans you could secure from a financial institution or an individual.
A lender might allow you a loan on the agreement that you promise to pay back and trust that you will. Or they may want more than a promise to give you a loan. You may be asked to use one of your assets as security for the loan.
So, what’s the main difference between secured and unsecured loans?
Secured loans are the ones you will back up with an asset as security. Based on the loan-type you want, you will need to back it up with a relatable asset. For instance, you may be asked to secure a mortgage loan using a house, and you may have to part with a car for an auto loan.
Unsecured loans, on the other hand, don’t ask for any backup or security. For this reason, the lender won’t automatically seize any of your property if you fail to pay up. Examples of such loans include students’ loans and personal loans.
Here’s a detailed distinction between secured and unsecured loans that you may not know of.
Interest Rates Express the Difference Between Secured and Unsecured Loans
One of the distinctions you ought to be looking out for between these two types of loans is the interest rates. While secured loans are riskier to take, they have lower interest rates because they have security.
On the other hand, unsecured loans tend to attract higher interest rates since they lack the security to back them up. They are much riskier to the lenders, and so they must transfer some of that risk to the interest rates they charge.
Credit Score vs. Secured and Unsecured Loans
Your credit score is something you should worry about when taking a loan, especially the unsecured ones. But, you don’t have so much to worry about when going for the secured loans. Your collateral helps you get a secured loan much faster but with higher risks attached.
Unsecured loans demand an excellent credit score record. It is an assurance that you will keep your promise and move with t to pay the loan as you have promised.
An excellent credit score not only makes it easy for you to have an unsecured loan but also attracts better loan terms such as lower interest rates and longer payment periods.
The Speed of Processing the Loans
One factor that pushes you into sourcing a loan is the urgency of the need for the money. You will feel dissatisfied when the loan you needed for urgent use is processed a month later.
You can get your unsecured loan within three hours of application and attend to your urgent matters.
For the secured loan, you may have to wait for up to two months after applying. This is due to the processes involved in assessing the collateral you are to give for the loan.
The Types of Secured and Unsecured Loans
Secured and unsecured loans exist in different forms and types. Have a look at the brief explanation of the different types of these loans below.
Types of Secured Loans
What are the different types of secured loans? Here are examples:
Since having shelter is one of the basic human needs, having one you live in without eviction is an added lifetime advantage. That explains the need for acquiring a home in any means possible, including securing it through a loan.
Unfortunately, though, home loans don’t come easy, and even when you get it, it doesn’t become your property entirely until you finish paying for it. When you get a home loan, the home is the collateral. If you fail to pay, the bank will come for the house as recovery.
Just like home loans, car loans are secured, and the lender will come for the car upon failing to pay as per the agreement. This type of loan is commonly for businesses or individuals.
Pawnbrokers offer short-term loans where they will expect you to place a temporary lien on the property you intend to use as collateral. You are most likely to part with your electronics, jewelry, and musical instruments, among others, as collateral.
The loan amount you attract depends on the value and current demand of the item you use as collateral. Your pawnbroker will then give you a limited period within which you must pay the loan. If you fail, the pawnbroker takes ownership of the property and sells it to recover the money.
Types of Unsecured Loans
What are the different types of unsecured loans? Here are some common examples of unsecured loans:
This is the loan you take to pay off other multiple small loans such as credit card loans, student loans, and other liabilities. A consolidated loan comes with better loan terms and is mostly unsecured.
A term loan is a loan your bank offers you with fixed repayment schedules with either a fixed or floating interest rate. It is a preference of small companies that need to acquire fixed assets such as company equipment or a building for new operations. While there are secured term loans, you can as well get unsecured ones.
A revolving credit loan makes it possible for you to access money up to a predetermined limit, usually known as a credit limit. Anytime you pay a given amount of the total balance, the amount is availed again for your use. Examples of such loans include credit cards and personal lines of credit loans.
Secured Loan Vs. Unsecured Loan: What Should You Go For?
What is the difference between secured and unsecured loans? Each of these loans come with specific advantages that set them apart from the other. Many guiding factors will lead you into picking one over the other.
At Captain Cash, we offer some of the best unsecured loans that demand little from you. With an active Canadian bank account, active monthly income of above $1200, and other achievable demands, you can always secure a loan with us. You can’t let such offers bypass you, contact us today and sort your urgent cash issues with speed.