In the financing world, there are, generally, two different types of loans. There are secured and unsecured loans. The key difference between the two is that one comes with collateral, designed to protect the lender if the borrower defaults payments.
What is a Secured Loan?
Secured loans come with an asset that is used as collateral for the loan. This asset can be seized in the event that the borrower does not pay their loan on time. The asset can be a car, or a property, and it can be used to help protect the lender by collecting their funds, in the event of the borrower not paying their loan.
The most common types of secured loans are mortgages and cars.
Pros of a Secured Loan
Secured loans typically come with a lower interest rate because of the collateral asset. This collateral provides your lender with a greater level of financial security so they are less likely to charge higher interest.
You May Enjoy Lower Payments
Because of the lower interest rate, you may get to have slightly lower repayments with a secured loan.
You Have a Longer Payment Term
Secured assets give your lender more security. So they may be able to offer longer terms. This can help reduce your fortnightly or monthly expenses and help you keep on top of your budget.
Cons of a Secured Loan
If you Default, You can Lose the Asset
With a secured loan, your lender has the right to seize your asset (such as your car) if you default your payments. So there is a risk of losing your specific assets with a secured loan.
What is an Unsecured Loan?
An unsecured loan has no collateral. Therefore, lenders typically have a tougher list of requirements for borrowers. They must have a high credit score and you will likely encounter higher interest rates so that the lender has a better sense of security around the risk of loaning to you. Types of unsecured loans are credit cards, student loans, and unsecured personal loans.
Pros of Unsecured Loans
There is No Risk to Your Assets
Unsecured personal loans don't include an asset such as a car as collateral. This means that you don’t have to worry about losing your personal property if something happened to your income such as losing your job suddenly.
More Flexibility
There is typically more flexibility with unsecured loans than secured loans. They are typically smaller loans. However, you can often get loan top ups if you need to.
Cons of Unsecured Loans
Higher Interest Rates
Because there is no collateral protecting the lender from the risk of default payments, the lender will protect themselves by charging higher interest rates. This can mean your monthly payments will be higher!
Tighter Approval
Unsecured loans may be a little harder to get approved. Because there is no collateral, the lender will need to make sure you have a high credit score and that your income and expenses will not hinder your ability to pay them back.
