There are mainly two different types of loans that can be issued to an individual by a bank or other financial institution – secured loans and unsecured loans. Here in this article, we will explore the various differences between these two types of loans.
The secured loans are those that are secured by collateral or an asset of some kind. The purchased items such as a car or a home can serve as collateral. A lien is put on such items. The bank or the financial company will hold the title or deed until the total amount of the loan has been repaid back along with all applicable fees and interests. Other items like bonds, stocks or personal property items can also be used for securing a loan.
Secured loans are by far the best way to get large sums of money as loans. Unless there is some sort of solid guarantee, a lender will be highly unlikely to loan out a large sum of money simply at the word of the mouth of an individual that the sum will be repaid. On the other hand, putting a car, a home or some other kind of property on the line is a good way to guarantee that a person will do everything that is possible to get the loan repaid within time. Some of the most common forms of secured loans are mortgage or home loans, construction loans, bridging loans, term loans, and car loans.
Unsecured loans are those that do not involve a guarantee of payment or collateral like the ones commonly associated with secured loans. Some of the common forms of unsecured loans include credit card purchases, personal (signature) loans, student loans, certain home improvement loans and personal lines of credit. As the lenders take a considerable risk by making such loans without any assets or property to recover if there is a default, the interest rates for these loans are considerably higher.
When a person applies for an unsecured loan, the lender of the money believes that he or she will be able to repay it based on personal financial resources. There are five different criteria used for judging a person before an unsecured loan is approved. These include character, capital, collateral, capacity, and conditions. The criteria character, capital, collateral, capacity is used to judge a person’s creditworthiness as well as the willingness to pay the loan back. Conditions relating to the situation of the borrower and various economic factors.