You probably heard the terms secured loan and unsecured loans and wondered what exactly is the difference between these two types of loans? You probably ask yourself, which is the best one to choose when shopping for a loan. If this sounds like you, here are some tips to help you understand the difference between these two loans.
Secured loans have an asset or some sort of collateral attach to the loan such as a car or home that you own. The financial institution that you use to acquire the loan will hold the deed to your home or the loan title until you pay the loan in full plus any interest and fees. You can use other items to secure the loan as well such as stocks and bonds.
Secured loans are usually easier to obtain because the lending institution has the assurance that they will receive their money back because the borrower do not want to lose their property. They usually come with lower interest rates, longer repayment terms and higher borrowing limit. Of course the borrowing limit depends on the collateralized property.
Unsecured loans differ greatly to secured loans and depend on your financial resources and credit standing, but most importantly, you do not have to use any property to secure the loan. Unsecured loans include personal loans, credit cards, student loans, home improvement just to name a few . The lending institution looks at your credit score, current earnings, stability and other factors to determine eligibility. Generally, a secure loan comes with higher interest rates depending on your creditworthiness. So if you have blemish credit, your interest will be higher than someone who has stellar credit. The lender understands they are taking a risk and want to make sure you have enough income to repay the loan and your credit score meets their stands.
Additionally, a secure loan normally has a set amount that you repay at the same time monthly, and the terms of the agreement stays in place until the bill is eliminated.
The best thing to do when shopping for a loan is to understand how the loan works, and determine whether you can afford the payments. Lastly, shop around as no two lenders offer the same type of loan and interest rates and terms vary greatly that’s the only way you will get the best deal.