A loan is a big financial commitment. Once you opt for a loan, you will be required to set aside a portion of your income for repayment of the loan. This process continues until the entire amount due is repaid. Failing to make payments can draw legal consequences. Considering your financial status, you can opt for either of the two main types of loans - Secured Loans or Unsecured Loans.
While there are different kinds of loans offered by financial institutions, all of them fall under two main categories; Secured Loans and Unsecured Loans. While both have their own advantages and disadvantages, it is better to know their pros and cons before making a decision. Only by understanding the difference between the two types of loans, will you be able to opt for a suitable one.
Secured Loans
As the name suggests a secured loan is one in which, the bank grants a loan in return for a collateral. The collateral may be in the form of a house or a car. Since there is collateral, the bank tends to lower the interest rates for this type of loan. However, there is a catch. If you fail to make payments, the bank can rightfully take possession of the property you have presented as collateral.
Nevertheless, secured loans have some unique benefits. Since the lender has your asset as collateral, there is a strong foundation of trust and low risk involved. Even with a bad credit history, it is possible to avail a secured loan because your secured asset is an assurance for lenders. However, if you are involved in any other debt problems, obtaining further loans is not a good idea as it may land you in legal complications.
Unsecured Loans
Here, the lender truly relies on the obligation to repay, since there is no collateral involved. And if you are not able to make the repayment, the lender has nothing to take possession of. And this is also why unsecured loans are accompanied by higher rates of interest and a shorter term of repayment, as compared to secured loans.
To avail an unsecured loan, you must have a good credit history. A low credit score cannot fetch you an unsecured loan. Also, unsecured loans are best suited for small purchases. Because, if the amount you borrow is not high, you will be able to repay it within the stipulated time period. Else, the high interest rates associated with this type of loan can make repayment very difficult.
If you have a collateral and a good debt management plan, secured loans are a good option. Although credit history is not a deciding factor for a secured loan, you could lose your asset if there is a default in payment. On the other hand, to avail an unsecured loan, you need to have a good credit history. Since unsecured loans have higher interest rates, it's advisable to take the loans in smaller amounts. This can assure a definite repayment.
While there are different kinds of loans offered by financial institutions, all of them fall under two main categories; Secured Loans and Unsecured Loans. While both have their own advantages and disadvantages, it is better to know their pros and cons before making a decision. Only by understanding the difference between the two types of loans, will you be able to opt for a suitable one.
Secured Loans
As the name suggests a secured loan is one in which, the bank grants a loan in return for a collateral. The collateral may be in the form of a house or a car. Since there is collateral, the bank tends to lower the interest rates for this type of loan. However, there is a catch. If you fail to make payments, the bank can rightfully take possession of the property you have presented as collateral.
Nevertheless, secured loans have some unique benefits. Since the lender has your asset as collateral, there is a strong foundation of trust and low risk involved. Even with a bad credit history, it is possible to avail a secured loan because your secured asset is an assurance for lenders. However, if you are involved in any other debt problems, obtaining further loans is not a good idea as it may land you in legal complications.
Unsecured Loans
Here, the lender truly relies on the obligation to repay, since there is no collateral involved. And if you are not able to make the repayment, the lender has nothing to take possession of. And this is also why unsecured loans are accompanied by higher rates of interest and a shorter term of repayment, as compared to secured loans.
To avail an unsecured loan, you must have a good credit history. A low credit score cannot fetch you an unsecured loan. Also, unsecured loans are best suited for small purchases. Because, if the amount you borrow is not high, you will be able to repay it within the stipulated time period. Else, the high interest rates associated with this type of loan can make repayment very difficult.
If you have a collateral and a good debt management plan, secured loans are a good option. Although credit history is not a deciding factor for a secured loan, you could lose your asset if there is a default in payment. On the other hand, to avail an unsecured loan, you need to have a good credit history. Since unsecured loans have higher interest rates, it's advisable to take the loans in smaller amounts. This can assure a definite repayment.
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