Loans are an essential financial vehicle of our age. Banks are ready to offer loans in order to cover almost all of your financial needs. These loans can help you a lot with your financial plans like starting a small business, buying a house or a car. But, banks do have preconditions before they are ready to lend you money. The lender wants to make sure that he will get the money back with the interest. Therefore, the lender goes through the financial details of the borrower or requires some kind of security before offering a contract. There are different types of loans which deal with the security aspect of these contracts. The following text will go through the details of these loans.
A secured loan is a type of loan which is backed by assets belonging to the borrower. This security decreases the risk taken by the lender in offering the loan and in turn the lender feels more comfortable to give his money. The assets offered by the borrower would be handed over to the lender in case the borrower fails to pay back the loan.
Secured loans are usually the best and at times the only way to obtain a large amount of money. This is because no lender is ready to give away a large amount of money without the assurance that it will be paid back. Putting your home or other property on the line is a safe guarantee that you will try your best to repay the loan.
Examples of security loans are the following:
· Auto Loan
· Home equity line of credit
Advantages of Secured Loans:
Secured loans have several advantages both the parties in the contract. One of the biggest advantages for the borrowers is that he can have a large amount of money as the lender has an assurance of the return. Secured loans offer lower interest rates, higher borrowing limits and longer repayment terms than unsecure loans. Secured loans can be used by people who are at times denied an unsecure loan.
Disadvantages of Secured Loans:
A major disadvantage of secured loans is that you have a risk of losing the property you backed the loan with if you fail to repay the loan. The lender has the option to sell that property and recover his money.
Unlike a secured loan, unsecured loans are extended only on the basis of the borrower’s financial position, credit history and reputation. The borrower signs a promissory but the contract is not backed by property owned by the borrower. This type of loan is also called a character or good faith loan. This type of loan includes things like credit card purchases, education loans or personal loans. The lender takes a risk with this type of loan as he has no property to claim in case the borrower fails to pay back. When you apply for an unsecured loan, the lender believes that you will be able to pay it back on the basis of your financial position. Your application is also considered based on the 5 C’s of credit which are character, capacity, collateral, capital and conditions.
Examples of unsecured loans are:
· Credit cards
· Personal loans
· Education loans
Advantages of Unsecured Loans:
One of the biggest advantages is that you don’t risk losing your house or property if you fall back a little on the payments. You enjoy financial flexibility and get a loan at the same time. Your money or property is not tied down until the time you pay back the amount as with secured loans. They are also called signature loans as the bank cannot claim anything but your signature.
Disadvantages of Unsecured Loa
The financial ease enjoyed by having an unsecured loan comes at a price. As the lenders do not have an assurance of their money in terms of backed up property, they charge much higher interest rates on unsecured loans and the repayment periods are shorter compared to secured loans. You may also not be able to loan a large amount of money through unsecure loan contracts. Unsecured loans are also comparatively difficult to get especially without a good credit history.