Secured loans Vs. Unsecured loans

They say that all men are born equal, but this is not true when it comes to finances. The fact is that a person’s inherited family background, responsibilities, circumstances, and other factors, shore up and determine one’s financial status. When there is a gross disparity between the income and the expenses in a person’s life, they are forced to prioritize and there are circumstances when they are forced to borrow.

There are certain other purposes for which also people go in for loans. For instance, people who want to extend their homes, who want to go on an adventurous holiday tour, or who want to judiciously amalgamate all their loans into a single liability – all these people also shop around for loans.

There are two types of loans. One is secured and the other – unsecured. In a secured loan, the borrower is expected to give an asset as a collateral for the loan. The asset may be a home, a car, stocks or any other high-value item. If there is a failure in repayment of the loan, the lender has the right to sell the asset and that’s how they will recover their dues.

Secured loans are safe for the lender because they have the asset as collateral for backing up the money lent. For the borrower, the advantages are that the rate of interest is cheap, the amount of money got as a loan is relatively high and the repayment period is also reasonably long. Even if the borrower has a poor track-record for credits, the lender may decide to approve the loan since the asset is there as a back-up.

In an unsecured loan, no asset is involved. The borrower’s credit-worthiness is assessed based on their present income, their other loans, how they are currently repaying their other loans, and other factors. Once this assessment is over, the lender decides the loan amount, the repayment period, and the rate of interest. In this case, the money lent is usually less than that in the case of a secured loan, the repayment period is shorter, and the rate of interest is higher. The lender may insist on a guarantor, for if the borrower does not repay the loan, the lender recovers the loan amount from the guarantor.

In an unsecured loan, since no asset is given as collateral, the question of the borrower losing the asset does not arise. The borrower can just pay back the loan and heave a sigh of relief in view of the relatively short period of repayment.

Some people borrow money for their business or for expanding their businesses. Whatever may be the purpose, keep in mind that it is only a temporary arrangement. People should not become habitual borrowers because once if they get into this web, it will be very difficult for them to get out.

Usually lenders are very strict and they will be obstinate in insisting on timely repayments. Hence, one should think of loans only as the last alternative. If such a situation arises, there should be concrete plans for repaying the loan on time.

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