Difference Between Secured Loan And Unsecured Loan

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There are basically two types of loan that you can avail. These are secured loan and unsecured loan. However, to make the right decision on what type of loan is best suited for your needs, it is important to understand the difference between secured loan and unsecured loan.

A secured loan is a loan in which you offer the lender some kind of guarantee that they will receive the payment for the loan from you. You can pledge assets like your home, car of stock certificates as guarantee. Although you do not have to hand over the assets to the lender, having them in your possession assures the lender that if you default on the loan, they will be able to seize the assets, sell it and recover their losses.

In contrast, an unsecured loan is a type of loan which is given to you based on your credit rating. People who do not have assets or who do not want to pledge their assets prefer to borrow money through this type of loan. Here the lender will charge a higher rate of interest as he is taking a risk by lending you the money. He has nothing to seize and sell in order to recover the loan amount should you default on your loan payment.

You need to see which loan, secured or unsecured, is better. You should consider what is important for you. If getting a lower interest rate, high loan amount and long repayment period are important, then you should go for a secured loan. On the other hand, a person with a good credit score may not be a big risk but he is a risky prospect nonetheless.