The downward spiral of the US economy in recent years has driven people to apply for loans to for various reasons. But perhaps the most common reason why people apply for loans is basically to stay afloat financially until such time they can get a stable financial foothold. If you are someone who is looking to apply for a loan, you may have heard of secured loans and unsecured loans. Before you troop down to your potential lender, it is best that you understand what the major differences between a secured loan and an unsecured loan are.
Secured loans are loans that require the borrower to pledge an asset as means of collateral. The collateral may vary in form such as a car, a home, or any other asset with a value that can cover most or the entire amount the borrower applies for. The collateral serves as a protection for the lender in the event the borrower defaults.
If the borrower fails to repay the debt within the agreed timeframe, the lender can take possession of the collateral and then sell it to regain most or the entire amount that was loaned to the borrower. At least that is the general perception of a secured loan and how it works. There are underlying technicalities on which a debtor (borrower) can arrange for late payments and still keep the collateral.
Unsecured loans, on the other hand are the exact opposite of secured loans. The default arrangement is that the borrower does not provide collateral when applying for the loan but rather a promise of satisfying the terms of payment. In essence, lenders rely on their clients’ word that they will pay once the amount has been released. This type of loan puts lenders in a more risky position since they do not have collateral to put the debt against if the borrower defaults.
Another significant difference between secured loans and unsecured loans is that most people go for secured loans if they need huge funding for bigger projects such as a car or a home purchase. Unsecured loans, on the other hand, are only viable and plausible for small purchases such as computers, vacations, and unforeseen events like medical emergencies.
Whatever loan you decide to apply for, both call for you to be mature and responsible with how you will handle the funds once they are approved and make sure you comply with your loan’s payment arrangement. Most important of all, do not apply for a loan when it is clear that you don’t need the money in the first place.