Differences Between Secured and Unsecured Loans
Personal loans have been on an upward trend in the past few years. This has been contributed by low interest rates around the world. It has also been contributed by the increased use of smartphones and the internet. The two types of loans that have been growing are secured and unsecured loans. In this article, we will look at the differences between the two. We will also look at the types of loans you should consider.
What is a Secured Loan?
A secured loan is a type of financing that requires a security. This security is also known as a collateral. The collateral is something of value that can be sold in case the borrower defaults. There are many types of collaterals that can be used to secure a loan. These includes houses, land, car, and a helicopter among others. Generally, the asset should have more value than the loan that is given out. The goal of the borrower is to pay the loan and continue possessing the asset. Secured loans are given by banks and private equity lenders and other types of financiers.
What is an unsecured loan?
An unsecured loan is a type of loan that does not require the borrower to submit a collateral. This loan is usually mostly based on trust and data. Banks give unsecured loans to customers that they know well. For example, if you make $2,000 every month, the bank knows the amount you make. As such, it can easily give you money because it knows that you can easily pay back the money. They are also given by online lenders, who use data to know whether you can pay the money. Companies like Revolut, SoFi, and Tunaiku have a history of extending this credit to users.
Pros and Cons of Secured and Unsecured Loans
The two types of loans have their benefits and disadvantages. The first benefit of secured loans is that the amount is usually higher than that of unsecured loans. This makes sense. This is because a lender can give you any loan provided that there is an asset behind it. Unsecured loans on the other hand are usually smaller. This is because, if you fail to pay the loan, the lender will not have a way of getting its money back.
Secured loans are also known for their long duration. If you have taken a mortgage, you know that the payment period can be as long as 30 years. This does not apply to unsecured loans. These loans have a very short repayment period. The period ranges from less than a week to a few months. The reason for this is that waiting for so long can lead to defaults.
A substantial amount of unsecured loans are usually given out online. Companies like Tunaiku have developed Tunaiku Android and Tunaiku iOS apps that give out millions of loans every month. The same is true with other companies like Ally Bank and Revolut. Most secured loans is given out in offices. The process is usually longer because the lender needs to value the collateral.
Final Thoughts
Secured and unsecured loans are the two most popular type of loans. There are other types such as venture loans. In this article, we have looked at the main differences between these types of loans. As a borrower, you need to think carefully before you apply for a loan.