Secured Loans vs. Unsecured Loans

There are situations in our lives when we can not manage any more with our incomes and have to borrow, in one way or another, some money. Whether we need to buy a home, or a car, or pay for our children studies, there are moments when we have to get money from another source. If a friend or a family member has the possibility to lend us the money, then we are lucky. However, most loans we make are with financial institutions such as commercial banks, credit unions and mortgage companies. Loans are not all the same, but all of them fall into one of two main categories: secured loans and unsecured loans. Each type of loan has its advantages and disadvantages.

Secured loans are the most accepted way to finance large sums of money, as they are backed by collateral; usually a home, car, boat, and or another highly valuable asset. This means that if you can’t repay the loan, the lending institution will repossess the asset and sell it to recover the money you’ve loaned.

Because of this condition, secured loans are viewed negatively by some who worry that, for example, by offering their homes as collateral, they could be forced to move out one day.

Nevertheless, secured loans offer the opportunity to borrow much larger sums of money than unsecured loans and the payment rates can be spread over longer periods of time. The interest rates are also lower, since the lender has the certainty that he will recover the money loaned by selling your asset. Another advantage of getting a secured personal loan is a faster and more streamlined approval of the loan request.

Secured loans make it possible for you to repair a damaged credit score, because as long as borrowers pay on time, lenders will make positive credit reports to all the major lending institutions. Usually when borrowing a secured loan you choose to pay a fixed or variable rate, as well as decide to pay nothing for the initial term of the loan. This basically means that applicants for this type of loan have greater financial flexibility and more savings options than unsecured borrowers. If you think you won’t be able to pay your loans on the given period, you can always ask the lender to extend the term as they are interested in the money and not in your property.

When we talk about real estate, the most popular form of secured debt is the lien. Liens may be voluntarily created, like a mortgage, or involuntarily created, as in the case of a mechanics lien.

A mortgage lien can be created only with the approval of the title owner, without concerning other factors of the situation. In contrast, the main condition necessary to create a mechanics lien is that real estate is somehow modified through the work or materials provided by the person that fills a mechanics lien. Although there are complex rules for a mechanic lien, they do not require the express consent of the title owner.

On the other hand, the most common method for securing the debt for personal properties is described through the Uniform Commercial Code, which provides a system of public forms and documents by which the creditor's interest in the property is announced publicly.

Usually the contract for a secured loan will also provide a plan by which the property will be sold at public auction and a right or redemption provision, when a debtor may arrange for late payment of the debt but keep the property.

Unsecured loans, also known as a personal loan, can take the form of a credit card debt or a bank overdraft obtained through a lender who has verified you can re-pay the loan.

These types of loans do not require backing against the loan, as the lending institution relies on your contractual obligations to return the money.

The institution has no certainty that it will recover the money and the risk taken is great, therefore the sum that can be borrowed will be smaller, the interest rate higher and the repayment period shorter compared to the secured loan.

With all these disadvantages, a positive factor of this type of loans is the absence of any risk of losing your home and assets; it is cheaper than credit cards or store cards that usually have high interest rates. The main condition for an unsecured loan is to have a good or clean credit history.
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