Loans are the primary financial products offered by banks. Borrowing money through them has become increasingly easier and the limits on how much money an individual can get have grown in the last 10 years. While each loan may have different terms and conditions, depending on a variety of factors, such as the credit rating of the borrower and his relationship with the bank, almost all financial products can be divided into one of two categories: secured and unsecured. This characteristic plays an important part in the borrowing limits of a loan, as well as how affordable they are and the various restrictions that lenders might attach to them. Generally speaking, the type of loan is the most important detail in the agreement and it can have serious consequences for the borrower.
This having been said, what are the differences between the two and why do they matter?
By definition, both of them enable individuals to borrow certain amounts of money. This means that they have values, durations, and interest rates, as well as other possible terms and conditions. These are all common characteristics of any financial product offered by banks and private lenders.
Secured loans are often more difficult to obtain than unsecured ones such as payday loans. This is usually because the borrower needs to have a great relationship with the lender, which means that an individual should have at least a short financial history that banks can analyze, before applying for a secured loan. This having been said, the fact that these loans are secured means that the borrower must offer collateral to borrow money. This collateral is usually in the form of a piece of real estate such as the borrower’s home, but lenders may agree to secure loans against other items that have very high values, such as art or jewellery. Having the loan secured against the borrower’s’ property also enables lenders to offer considerably lower interest rates than those for unsecured deals.
The downside is that if the borrower cannot repay the money, the bank will be able to take possession of the property that has been offered by collateral. However, this rarely happens as most lenders allow individuals to first refinance their debt or consolidate it.
Unsecured loans do not require any collateral and are easy to access by individuals who do not have a considerable financial history. In many ways, unsecured loans are great tools for those who want to build up their credit rating, provided that they are used sparingly and repaid on time. These loans have slightly higher interest rates, lower terms (usually between two and five years), and lower values. The main advantage is that getting an unsecured loan is faster than an unsecured one. Most lenders even offer same-day unsecured loans that enable individuals to get the money in under 24 hours from the submission of their application.
Which Is Better?
There is no right answer to this question. It all boils down to the needs of every individual. Secured loans are traditionally preferred by individuals who need large amounts of money and have a lot of financial stability. These also have longer durations which means that they are better for people who have a stable financial life and can make payments for up to 10 years. On the other hand, unsecured loans have a shorter term, lower values, but do not require collateral. As a result, they are more useful for buying household appliances or electronic devices such as laptops, phones, and tablets.