What’s The Difference Between Secured And Unsecured Loans?

by Josh Biggs in Finance on 2nd October 2021

If the option to fund your dream was well within reach, wouldn’t you take it? That’s probably the rationale behind the piling loan applications banks receive every year. However, in today’s world, it’s not enough to think about taking a loan from a bank. It’s crucial to know and understand the various loan types and what they entail. 

Opting for a secured loan over an unsecured finance option may be the right choice for some, but is it the right one for you? Besides, what’s the difference between secure and unsecured loans in the first place? Keep reading to find out. 

1. Secured loan. 

Secured loans, as the name entails, are financing options protected by the borrower’s assets. That means that for every loan taken from a bank or specialized financial institution, there must be adequate collateral. 

The lender has the right to the title documents of the car, house, land, or commercial property put up as collateral until the loan is paid in full. Various items can be used as collateral when applying for a loan, for example, bonds and stocks. 

2. When are secured loans used?

Most financial institutions that lend large amounts of money will require tangible assurance. To alleviate the risks banks and other financial institutions have to face, the borrower must put a valuable asset on the line. For example, many smart startups take business loans to kickstart their entrepreneurial journey. 

However, the business owner or partners will have to provide the lender with a security guarantee that the loan will be repaid. In the case where the borrower defaults, the lender can then use that ‘guarantee (collateral) to pay off the loan. However, the bright side to secure loans is the extra motivation borrowers have to ensure their investments go through so they don’t lose their collateral. 

Examples of secure loans. 

  1. Mortgages: In June 2020, mortgage applications spiked at about 8.0 percent from the last week according to the Mortgage bankers association. This went to show how consumer confidence is growing, and how many more people are taking quantum steps to live in their own homes. However, the statistics fluctuate depending on economic and governmental factors. So what is a mortgage? These are loans people take to pay for a home. It includes the principal, interest, insurance plus taxes and is usually charged monthly. 
  2. Home equity line of credit: Such loans allow people to use their home’s equity to obtain loans from financial institutions. 

Other examples are auto loans, boat loans, and recreational vehicle loans. 

3. Unsecured loans.

Loan types range from personal loans, business loans, salary loans, etc. However, all of such loans fall under either secured or unsecured loans. Unsecured loans do not require any collateral. The lenders are at more risk of defaulted payments because there is no collateral to bind the borrower to redeem the loan religiously. Examples of such loans are; credit cards, personal loans or commercial bridging loans. However, there’s a catch; the interest rates on unsecured loans can sometimes be higher than secured loans. This is why it’s best to seek help from a trustworthy broker like Finbri who are able to compare the best rates across the whole market, finding you the right lender for your circumstance when you are looking to fund your next commercial property.

Requirements for unsecured loans. 

  • The lender can only be guaranteed repayment by judging the borrowers;
  • Character: credit score, employment history, references. 
  • Capital: Bank statement proving an active savings or investment account. 
  • Conditions: There are special terms to unsecured loans that put more responsibility on the loan aspirant to pay. 

4. Major differences. 

Secure loans. 

  • Banks approve applications with collateral that is valued at/above the amount the borrower needs. 
  • There’s no need for a guarantor. 
  • There’s more encouragement to pay loans. 
  • Defaulters must give up collateral. 

Unsecured loans.

  • No need for collateral. 
  • Good financial history or credit is enough.
  • A good application with supporting documents is all that’s required. 

Categories: Finance