Did you know that the number of people using personal loans has grown from 11 million in 2010 to roughly 21 million in 2020? The fact that interest rates are near an all-time low most likely contributes to this.
Are you considering getting a loan for buying a house? Do you know the difference between secured vs. unsecured loans? Both loan options offer very different financial support.
The following guide will explain the pros and cons of secured and unsecured options when choosing a home loan. Read on to determine which loan type is right for you.
What Is a Secured Loan?
Collateral backs a secured loan. Lenders need to know which of your assets you want to use to back the loan if you apply for a secured loan. A mortgage loan is the most common type of secured loan.
The lender then places a lien on your asset until the loan is completely paid off. Consider the risks of what you’re promising because the lender will claim your assets and sell them if you default on the loan.
Pros and Cons of Secured Loans
The biggest advantage of a secured loan is that lenders feel more comfortable. They are more willing to give loans to borrowers with lower credit scores because of this.
Interest rates tend to be much lower with secured types of loans. Larger loan amounts are more common with this loan type as well.
The biggest disadvantage is risking losing your deposit or property. if you fail Some loan stipulations give lenders the right to repossess your property without notice if payments aren’t made on time.
If your property is repossessed it still might not sell for the full amount that’s owed. The outstanding balance is usually sent to a collection agency and you’ll be responsible for paying off the balance.
What Is an Unsecured Loan?
Unsecured loans don’t require any collateral. A lender only requires a signature for this type of personal loan.
However, applicants gain loan approval based on their credit history and current income. Credit cards and student loans are other examples of unsecured loans.
Pros and Cons of Unsecured Loans
The biggest advantage of an unsecured loan is that it’s a fast and simple process. They also have fewer fees because there are no property assessments or title management services involved.
You don’t run the risk of losing your assets like with a secured loan. Unsecured loans often have fixed interest rates and repayment schedules. These loans are used for almost anything.
The biggest disadvantages of unsecured loans are higher interest rates and smaller loan amounts. You’ll also need to meet the credit and income requirements which sometimes make this loan type harder to obtain.
Not making payments on time will lower your credit score. Collectors will sue if you miss too many payments and you could end up having your wages garnished, a levy placed on your bank account, or a lien on your property.
Understanding Secured vs. Unsecured Loans
Now you know the difference between secured vs. unsecured loans. Both loans have their pros and cons depending on your financial situation. Plan carefully and choose your loan wisely.
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