Secured Loans let you use assets like your car or home to offset some of the bank's risk, which could unlock better offers.
While there are many ways to distinguish different lending products, including how the interest is structured, it’s especially important to know the difference between secured and unsecured personal loans. Whether a loan is secured or unsecured has a great impact on the type of offers a consumer can get, but also weighs heavily on what will occur if they’re unable to repay the loan.
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As hinted above, secured loans often come with a lower APR (interest rate + costs & fees) than unsecured loans, as they are deemed less risky by lenders. In addition, secured loans also tend to have higher borrowing limits, which is ideal for consumers looking to obtain large funds. Furthermore, borrowers with lower credit scores may find it easier to get approved for a secured loan if they have an eligible asset to include as collateral.
On the other hand, secured loans do run the risk of borrowers having the assets they choose as collateral becoming repossessed. Furthermore, if an asset does not cover the unpaid loan amount, lenders can take additional actions to recover funds. Secured loans also tend to have more restrictions for use than unsecured loans. It’s important for prospective borrowers to understand the risk of secured loans, and whether it is the right choice based on their financial situation and ability to make regular payments.
An unsecured personal loan, on the other hand, is not backed by an asset as collateral. As a result, if a borrower defaults on an unsecured loan, a lender has less avenues to recover their funds, although they can pursue action through a debt collection agency or other means. While the majority of personal loans are unsecured, secured personal loans often come with lower rates, since the lender is taking on less risk.
With regard to personal loans, a secured loan requires a borrower to back the loan with some type of collateral, in order to be eligible for and receive funds. If a borrower defaults on the loan, the lender can repossess the asset to account for any unpaid balance and/or fees.
Typically, a house or car are used as collateral with their intended loan products (a mortgage and auto loan, respectively), but both can also be used to secure a personal loan, depending on the loan amount. Other examples of assets used to back secured loans include: bank accounts, stock investments, equity from life insurance policies, other types of real estate, and precious metals along with other high-value personal belongings.
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