About Secured and Unsecured Loans

In the world of finance, there are two loan categories. The first are loans offered to you based on your credit score and past money management, and usually for smaller amounts of money. These are called unsecured (or personal) loans. They are commonly used for credit cards, bank overdrafts and general bank accounts for such items as holidays, home improvement or computing equipment.

The second type are loans secured by an asset (usually the asset that they are used to obtain). These are called secured loans.

Secured loans are method of arranging financing by offering an item for collateral. Common examples of secured loans are car and home loans, or mortgages. The loan is tied directly to the purchased item, in this case a car or home. It is also possible to take out additional loans against your home equity – for example a debt consolidation loan.

Low Interest Rates

Secured loans have advantages over their unsecured counterparts. Because the loan is tied to a physical item, the bank is reasonably confident they won’t suffer a total loss should you default on the loan. If you were to stop making payments on your car loan, for example, the bank would offer you warnings and a chance to remedy the situation. Then, if you fail to do so, the bank will repossess your car and sell it to cover as much of the remaining loan as possible.

While this would leave you without transportation and a rather serious blight on your credit report, the collateral based loan is to your advantage. When the bank feels secure lending you money, they do so with less cost to you. This translates to lower interest rates. An unsecured loan such as a credit card may have an interest rate well over 20%, but a typical car loan has interest rates under 10%. Mortgages rates are even lower.

Easy Approval

When the bank offers you a loan in the form of a credit card or line of credit, the institution has little to justify the risk. If you were to stop paying, they would have little or no means of recovering their money. But with a secured loan, the bank is able to repossess your home or car as necessary and thus is more willing to offer you the money.

If you’ve had difficulty obtaining personal loans or credit cards, it is likely you’ll have far less trouble gaining approval for a car loan. While your previous lending history and credit score do affect the interest rate on your loan, there are almost always banks willing to lend money secured with collateral.