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The Basic Facts About Secured and Unsecured Loans

Nov 28, 2007
People who are seriously thinking about getting a loan are bound to feel utterly perplexed by the sheer numbers of loans that are available in the loan markets of today.

There are loans for different types of purposes which offer different terms and interest rates, depending on the length of repayment and the amount concerned. And this provides only a small part of the picture. There are penalties, refinancing charges, variable and fixed rates to consider, among others!

Luckily, there is a lot of information available on the Internet; and one of the most frequent queries involves the subject of secured and unsecured loans.

In the case of loans, you will have to make a stand on security. Security is any asset with considerable value, such as a house or a car, which may be used as collateral against a loan.

In this sense, a secured loan is the financial assistance provided by the lender to a borrower, provided that the latter puts up his assets as security; if the unfortunate situation arises that he is unable to keep up the arrangement and repay the loan, the lender obtains the right to sequester the collateral as compensation for the unpaid debt.

To some extent, the lender seeks the comfort of collateral so that the lender's risk is limited as far as possible. In contrast, an unsecured loan is that which is not put up against the borrower's assets, but against the borrower himself. Both these kinds of loans have their own pros and cons. It is best to consider carefully before taking on either one.

If you are a property owner, a secured loan is a good option. This is especially desirable if you unfortunately have a bad history of credit, since the approval is not solely based on your rating, but on the value of your collateral. A popular type of secured loan is the savings secured loan, wherein the borrower establishes a savings account with the creditor.

A portion of this account is frozen and held as collateral until the debtor pays back the debt. This is a win-win situation for both parties, since the frozen money still accumulates interest; if the loan is not repaid, the entire frozen amount (including interest) goes to the lender. But once the money is paid off, the debtor gets back his asset.

Unsecured loans are a good option if you get one that is reasonably priced. Since the loan does not require collateral, this type may charge sufficiently higher interest rates than a secured loan.

However, if you want to be approved for such a loan, your credit must be in order. This type of loan is popularly used as the mechanisms for credit cards, wherein the debtor is charged with varying rates on his debt, especially if he does not make the full payment of it in time. The interest rate pile ups on the debt in the form of penalties. So the borrower has to keep making sure that he is on track with his payments.

Loans should ideally not put you in a financial mess. So make sure you look for some financial advice before making a move.
About the Author
Right from a unsecured personal loan to a secured loan for homeowners to even an auto loan , we get you all kinds of loans.
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