Secured vs Unsecured Loans

For both lender and borrower it’s difficult to decide whether a secured or unsecured loan is best. What are the benefits and drawbacks of each type of loan? How can you benefit as a consumer from one or the other? What types of benefits lie in either option for the creditor?

When you take a secured loan you offer up an asset to cover the in the case that you cannot repay the lender. The most common secured loan is a home loan. You as the borrower agree to pay the full amount plus interest or give up your home if you default. This gives the lender the legal authority to claim your home as payment for the outstanding loan.

If you miss one payment the lender could technically foreclose on the property and resell it. This almost never happens as it makes poor financial sense to the lender; however, you must realize that it is possible. Lenders know that foreclosures can be long and drawn out processes and so they avoid it unless it’s absolutely necessary. No lender will foreclose for something as trivial as a missed or late payment. You typically will be given a grace period of several weeks or months to pay what you owe before the creditor will take any legal action against you. Lender’s for the most party do not want to involve themselves with removing a homeowner and reselling the property.

With an unsecured loan the lender also has the ability to have some assets seized such as salary, stocks, bonds, and other properties that you own. The lender only has to navigate a simple legal process in order to declare you as in default and to recoup what they are owed.

One thing you need to realize as a borrower is that unsecured loans, such as credit cards, generally have a higher interest rate then a secured loan such as a home mortgage. Lenders providing unsecured loans are taking larger risks in providing you with a loan. Increased interest rates help to protect them against account holders who default. Most people will try harder to pay loans that will result in them losing their home if they default than on a loan such as a credit card.

Each type of loan has its pros and cons and you should weight these when deciding what type of loan you wish to obtain. Only you can decide whether the increased interest rates of unsecured loans are better or worse for you than secured loans where you could lose your home.

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