It has come to a lot of people’s attention that there’s a big difference between secured loans from unsecured loans in their search for financial options. Both options have advantages and disadvantages however I can tell you that both options put the borrower on a difficult spot as any debt does. The type of loan they will use will either be a secure loan or an unsecured loan. Some people do not understand the difference so this article will provide you with some background information regarding both loan types. This article will also help you determine what type of loan you are entering into and understand the features.


Secured Loans

The initial loan type is referred to as secured loan. What is it? Secured loans are the most accepted way for financing large sums of money. Secured loan is a debt classification in which the lender has been given a portion of the rights to a specific property usually the borrower’s home as collateral. This means if you entered into a secure loan and you failed to make payments for that loan, the bank or lender can repossess your home. Because of this, secured loans became unpopular because there are many people who believe that by offering their home as collateral they are forced to move from their home.

In this type of loan, you also have the option of using a co-signer who can takeover the payments if you are unable to. Other purchases that require a secure loan would include a boat, a vehicle, and land. Apart from a lower interest rate compared to an unsecured loan, some lenders allow the borrowers to extend the period of repayment. The typical repayment period extends between 5-30 years however it increases the interest that a borrower will have to pay.

Unsecured Loans

The second type is called unsecured loan. What is unsecured loan? Unsecured loans were developed as an alternative to the secured loans. It’s a debt that’s not tied to any piece of property or real estate. However unsecured loans are more costly than the secured loans.

An example of an unsecured loan is a credit card. The rate of interest charged from an unsecured loan client is higher because of the larger risk of not getting paid back. When you enter an agreement with a credit card company, the credit card company does not have or request any collateral from you. That’s the reason for so much fuss about credit history. Credit history is a record of payments an individual does to settle the credits made and also develop good credit behavior. Any failure by an individual on any debts, loans, or mortgages is immediately recorded in the credit file. Lenders prefer the borrower to have a good credit history because they do not have collateral on you. That is why it’s harder for credit card companies to obtain payments from you. You can use unsecured loan and spend it on anything from dental work to fixing up that old porch you’ve always wanted to rebuild. Since the lender doesn’t know what you are spending the money on they will also charge a higher interest rate than a secure loan.