The Differnce between Secured Loans and Unsecured Loans

In the financial world, there is an entire language used that most people are not familiar with.  However, if you want to be armed with the tools necessary to exact change in your financial situation, it is a must that you understand what these financial terms mean.  Two such terms related to the area of lending are secured loans and unsecured loans.

Secured Loans

Secured loans are those loans that use collateral to protect the lender in the case of default by the borrower.  This collateral could be the borrower's home, vehicle, or some other asset that the lender deems necessary.  If the borrower were to default on the loan, any or all of these possessions that were used to back the loan could be seized.  The lender would then sell these in order to recover as much of the cost of the loan as possible.

Unsecured Loans

An unsecured loan is the opposite side of the coin.  The loan, in this case, is not backed by any assets or possessions that the borrower may own.  This type of loan is viewed as a greater risk for lenders since there is no property to sell in the case of default.

Due to this added risk, the lender may require that the borrower have a co-signer who would be responsible for repaying the loan if the borrower defaults.  Unsecured loans are also reserved for those with excellent credit as another safeguard for the lender.

Secured Loan vs. Unsecured Loan: What This Means for You

On the surface, an unsecured loan may seem more favorable to the borrower than a secured loan.  None of the borrower's property is up for grabs if they default.  However, beyond putting the credit of the co-signer in a vulnerable position, there are the interest rates to consider.  Since the secured loan is backed with collateral, they often have lower interest rates than their unsecured counter-parts.  These are things you should consider if you are in the market for a loan.