If you've been researching loans for your next big purchase, chances are that you've seen the terms "secured" and "unsecured." Here is a break down of the differences:
Secured Loans
A secured loan is a loan backed by an asset. Because they’re backed by an asset, secured loans are lower risk for lenders. Assets that serve as collateral are typically high value items like homes or cars. The lending party holds onto the deed or title to the asset or they place a lien on the asset until the loan is completely paid off. The most common types of secured loans are home equity lines of credit, mortgages and auto loans.
When an individual takes out the secured loan, he agrees that the lending party is allowed to repossess the item that serves as collateral in the event that the loan's repayment terms are not met. This presents an element of risk for the borrower, as a vehicle can be taken back by the lender on a defaulted auto loan and a home can be seized by the lender when the mortgage goes into default.
Unfortunately, forfeit of property isn't the full extent of the damage. Borrowers can also owe money on the loan even after the property has been seized. After it is repossessed, the property is sold and the proceeds are applied to pay the balance of the loan. Often, the property won't sell for enough money to pay off the loan. In these cases, the borrower is charged with paying the remaining money.
Unsecured Loans
When most people think of loans, unsecured loans are what comes to mind. Unlike secured loans, an unsecured loan does not permit the lender to seize any property to compensate for the unpaid balance. When a borrower fails to make a payment on an unsecured loan, the lender reports the late payments and the default to all of the credit bureaus. Unsecured loans are harder for many to obtain since they require a higher credit rating. These loans typically come with a fixed term and a fixed interest rate, meaning that there is a set amount of time in which the loan must be repaid, the payment amount will be the same each month and the interest rate will not change.
The Long and Short of It
If you've had trouble qualifying for a loan with bad credit, try for a secured loan because you're more likely to be approved because more of the risk falls on the borrower instead of the lender. If you have a bad credit score, a secured loan is a good option to make the purchase you need and bolster your credit at the same time.
