Financial Advisor

The Difference between Secured and Unsecured Loans

Debt is common in these modern times, but not all debts could result in your losing your home or vehicle if you should find yourself unable to make your payments. This is essentially the difference between secured and unsecured loans. Secured loans have collateral attached to them so that the lender can foreclose if you neglect your financial obligations. Unsecured loans do not have this association, but this does not mean that lenders cannot take action in order to receive compensation for having approved your loan application.

The difference between the two types of loans has implications both for the lender and the borrower. When you have property as collateral for a secured loan, you give the lender the authority to take this property and sell it in order to recoup any losses as a result of your defaulting on the loan. This fact means that the lender has to assume less risk in approving the loan and so you will get a better rate of interest for the financing charges. If you take out a mortgage on a home or a loan for a vehicle, then you have a secured loan.

Since the lender does not have collateral to fall back on. This means you will have to pay a higher rate of interest on such an unsecured loan because of the increased risk to the lender. A good example of this form of loan is the money you owe on a credit card or a store card.

If you use the money from an unsecured loan to purchase a piece of furniture, a car or even a home, you have the right to sell it on your own in order to obtain the money you need to repay the money you borrowed. In most cases, the lender does not even know how you used the money. Since there are legal documents detailing the property under a secured loan, you do have to work through the lender in the majority of cases if you want to sell the property.

The biggest disadvantage of a secured loan occurs if you should find yourself unable to make the payments. This may force the lender to take steps necessary to foreclose on the property. While you do have the option of making a private sale with the funds going towards paying off the balance of the loan, if you allow the foreclosure to proceed, the lender will accept a reasonable price that may not even come close to what you owe. As a result, you are still in debt and have an obligation to repay the rest of the money.
Todd Moore is a freelance writer with many years of experience writing articles on rate loan related subjects. Take a few moments now to visit our site and see what we have in store for you.

The Difference between Secured and Unsecured Loans / Author: Todd R.