Understanding Secured vs. Unsecured Debt
You might have heard from many people that loans are one of the finest ways to finance unexpected and immediate needs. Now, there are various kinds of loans out there, such as home loans, car loans, Debt Consolidation Loan, and many more.
Generally, there are two ways you may go about getting loans. These are the secured and unsecured debts or loans.
While these two kinds of debts come with many similarities, one major element that divides these two is the collateral that needs to be put down. Want to know more about these loans? You are at the right place! In this blog, I will demonstrate to you what secured and unsecured debts are.
[1] What is secured debt?
As the term pretty much says, secured debts are the kind of loans where you are required to put down some assets as collateral for the loan. It generally means that in the event of default, the lenders may seize the asset to accumulate the funds it has advanced the borrower. Auto loans and mortgages are some of the common examples of secured debt. Here, the item that is being financed actually becomes the collateral. In case the borrower fails to pay the loan amount, the lender may seize the vehicle.
[2] What is unsecured debt?
These kinds of debts have no collateral backing. As the name once again pretty much says it all, these loans do not require any security. In case the borrower defaults here, the lender has to to initiate a lawsuit to get the issues resolved i.e. get what they are owed.
Generally, lenders consider issuing unsecured loans based massively on the person’s creditworthiness and payback promise. Therefore, banks proceed to put higher interest rates on loans that are unsecured.
[3] Which one is more ideal for you
Well, not to sound too obvious, but I do not believe that there is a one-size-fits-all solution for everyone when it comes down to choosing between this. That being said, it is important that a borrower carefully checks out what these loans are and the characteristics of these debts to make an informed decision.
Collateral
It is the main difference maker between these two kinds of loans. Secured debts come with collateral, which is basically an asset that is there as safety of the loan by the borrower. Anything of value, such as gold, a home, a car, and other significant assets, might work as collateral. The lender does have the right to take possession of the collateral to recover the losses when the borrower defaults on the debt. On the contrary, there is no collateral there in an unsecured loan. In case the borrower fails to pay, a lawsuit will be initiated by the lender to retrieve the amount.
Rate of interest
When it comes to interest rates, the rate is way lower for secured debts. On the other hand, banks and other financial institutions proceed to put higher interest rates on unsecured loans.
The tenure
When it comes to tenure, generally, secured loans have a bigger tenure than unsecured loans. And the increased security by the collateral has a say in this.
[4] Wrapping Up
Both secured and unsecured loans can be attractive options; it all depends on your requirements. Whether you are considering a debt consolidation loan or any other, understanding these two kinds of loans is a must for every potential borrower.
