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There are many different types of loans available, ranging from mortgage loans to small personal loans. All loans have different credit requirements, payment options, interest rates, and consequences for missed payments, and they are all decided by the bank that issues the loan in the first place. No matter what type of loan is issued, it is consider either secured or unsecured, meaning that it either requires or doesn’t require collateral to be put up for the loan to be issued.
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| Unsecured Loans |
A secured loan is a loan where the borrower must put up some type of collateral for the loan, and in most cases the collateral is either a car or property. The creditor is able to take possession of the collateral if the borrower defaults on the loan, and it is normally sold in order to satisfy the remaining debt on the loan.
Banks choose to offer secured loans in order to relieve themselves from the financial risks, since they are able to get the debt paid off even if the borrower defaults on the loan. Secured loans are also offered to those with lower credit scores, since their payment history may be damaged due to past defaults.
An unsecured loan is a loan that does not require collateral, and is normally offered for smaller loans such as credit cards or personal loans. Borrowers with high credit scores can receive larger unsecured loans since their credit score shows they are able and willing to pay off their debts in a timely fashion, and no collateral is needed since the banks trust the borrower to pay the loan back. Because an unsecured loan cannot take over any property or collateral to cover the loan if it defaults, the bank must trust that the borrower will pay the loan back without default. Since banks are not able to take possession of property if the loan is not paid, they depend on late fees and high finance charges to make sure their borrowers pay the loans off in full.
The largest factor that will determine what type of loan an individual will be approved for is the credit score. An individual with good credit will be able to have an unsecured loan, while one with little to no credit must put up some type of collateral. Interest rates on an unsecured loan will be much lower than a secured loan, since a better credit score usually involved lower interest rates. While getting a secured loan is much easier for most people,loan collateral an unsecured loan is a better option in the long run. Less money will have to be paid overall in finance charges and other fees, and there is also no risk of losing any property. Unsecured loans only charge late fees or increase interest rates if a payment is missed, where a secured loan can actually take possession of the collateral and sell it to pay off the loan. Those with low credit scores will have to go for the secured loan, but those who have proven they are able to pay off their debts are able to get unsecured loans. Even though not everyone will be approved for an unsecured loan, any borrower can use a secured loan in order to increase his or her credit score. Credit scores increase with positive history from creditors, which result when payments are made on time each and every month that the loan is active.