Secured versus Unsecured Loans

secured vs unsecured loans

Last week, we talked about debts and how it is not a hindrance to investing and earning a little bit of money on the side. This week, we’ll talk about what gets people into debt in the first place: loans.

Loans are not bad. They are a source of emergency cash when people, or even businesses, need it. They are, however, a form of debt. It would be helpful to learn about what kind of loans are available for every individual or any entrepreneur out there can apply for when the necessity arises.

Generally, loans are classified into two groups – secured and unsecured. Let’s take a quick look at these two and see what they are.

Unsecured Loans

Unsecured loans are the more common of the two. Your credit card, for instance, is an unsecured loan.

It’s not entirely accurate to say that they are unsecured, because they are guaranteed by your credit score. Lenders will look at your credit score, which is an indication of your ability to pay based on your credit history, and make the decision to approve your loan application based on that information.

While they are a bit more difficult to apply for, if you have a slightly low credit score, they are also risk-free because you won’t have any properties seized if you default on your loan obligations. The worse that can happen is you will have to undergo a comprehensive debt restructuring program with your lender.

Secured Loans

Secured loans, on the other hand, are the opposite of unsecured loans. They are guaranteed not by your credit score, but by a tangible asset that acts as a collateral for your loan.

The most typical secured loan you can encounter is the auto title loan. When you apply for this one, you only need to present, typically, a valid ID, a proof of residence or address, and your car title. The auto mortgage must be fully paid in order for your car to be used as a security for your loan.

Secured loans do not require a good credit score. In fact, it’s possible that creditors will not look at your credit score at all when you apply for a secured loan. As a result, depending on each individual lender, the approval time could take less than an hour from the moment you provide them with the necessary documents.

Secured loans can be ideal for personal emergencies, as well as for raising capital to expand one’s business, if the need arises.

There are many types of assets that can be used as security for these types of loans, including your house title, or your retirement fund.

The downside to this type of loan, however, is that the lender will seize the asset when you default on your monthly obligations.

Under each of these two loans are a series of individual loans. We’ll look at these loans next time here at Hawryluk Legal.

Be sure to check back for more articles like this.

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