Do you want to learn the different between Secured loan vs unsecured and example of each loan at a glance. There are different kind of loan when it come to loan application. We have Unsecured loan and secured loan. However,loan can be a great way to get money when you need it either to improve your cash inflow, buy assets and other purposes.
Even though loans can be helpful when you intend expanding your business or cash inflow, it’s important to consider loan installment, Interest rate charges and fees when applying for any kind of loan with either from banks, credit unions, and online lenders
This Article will explain the different between secure and insecure loan when it come to loan application and what you need to know. Understanding the differences between the two is an important step in achieving financial literacy—secured loan requires borrowers to offer collateral, while an unsecured loan does not.
There are advantage and disadvantage to choose between secured vs an unsecured loan,
Secured vs. Unsecured Loans
Secured loans require borrower to offer up something a collateral in case you can’t pay back your loan which stand as security and also reduce the risk rate while an unsecured loan does not.This kind of loan is riskier to a lender and therefore associated with a high interest rate.
There are yardsticks used to assess a borrower’s ability to repay the debt, and can include the borrower’s situation as well as general economic factors which include:
1. Character – can include credit score, employment history, and references
2. Capacity – income and current debt
3. Capital – money in savings or investment accounts
4. Collateral – personal assets offered as collateral, like a home or car
5. Conditions – the terms of the loan
Our topic will be on Unsecured Loan and secured Loan ,Types and how they work.
1. Unsecured loan
When a loan is approved without the need for collateral rather than relying on a borrower’s agree to pay back the loan. This is a loan that is not secured by a collateral Borrowers qualify based on their credit history and income. Since there’s no collateral, financial institutions give out unsecured loans based in large part on your credit score and history of repaying past debts.
When a lender releases an unsecured loan, he does so after evaluating your financial status and assessing whether or not you are capable of repaying your loan. If the borrower defaults on this type of debt, the lender must initiate a lawsuit to collect what is owed. Therefore, banks typically charge a higher interest rate on these so-called signature loans
An unsecured loan to an individual may carry astronomical interest rates because of the high risk of default, while government-issued Treasury bills (another common type of unsecured debt instrument)
Examples of Unsecured Loans
2.Personal (Signature) Loans
3.Personal Lines of Credit
2. Secured loan
Secured loans are the most common way to borrow Huge amounts of money since borrower will deposit security during the loan application as collateral . A lender is only going to loan a large sum with a promise that it will be repaid. Putting your home on the line is a way to make sure you will do all you can to repay the loan.
A secured loan is normally easier to get, as there’s less risk to the lender. If you have a poor credit history or you’re rebuilding credit because borrower normally make use of an asset as collateral such as your home or car because losing your home or car is a powerful motivator to pay back the loan, and avoid repossession or foreclosure.
A secured loan means you are providing security that your loan will be repaid. The risk is if you can’t repay a secured loan, the lender can sell your collateral to pay off the loan.
Example of secure loan
1.Loan against property
2.Home equity line of credit
3. Car loan
5. Auto loans
For example of secure loan, a home mortgage lender often requires the borrower to take out homeowner’s insurance. By protecting the property, the policy secures the asset’s worth for the lender
The primary difference between secured and unsecured debt is the presence or absence of collateral—something used as security against non-repayment of the loan.