In the world of lending, there are two basic types of loans: secured and unsecured loans. Understanding the differences between these two categories of loans can help ensure that you get the best loan for your needs.
As you might guess from their name, secured loans are secured by an asset. Home loans and car loans are examples of some of the most common types of secured loans. If a borrower defaults on one of these loans, the lender can take possession of the asset that was used to secure the loan and sell it to recoup their money. This is why banks are able to repossess cars or foreclose on homes when borrowers fail to make their payments.
Unsecured loans are a bit different. Rather than being secured by an asset, the bank is simply trusting that the borrower will pay the loan back. A good example of this type of loan is a credit card. Credit cards are not secured by assets. Instead, when a bank approves you for a card, they are taking you at your word and believing that you will pay it back.
Generally, it is far more difficult to get approved for these types of loans. After all, they are less secure for banks and lenders since they don’t have any assets to fall back on if you do default on the loan.
As a result, they pay extra attention to your credit score and your history of working with other lenders. In most cases, you need an extremely high credit score to qualify for one of these loans.
There are, however, instances where lenders will approve people with bad credit for unsecured loans. These loans generally carry extremely high interest rates and have a number of different fees attached to them. Banks do this because they understand that borrowers who don’t have perfect credit scores have fewer options available to them and are less likely to resist higher fees and interest rates.
Understanding the difference between unsecured and secured loans can help you determine which type of loan is right for you. Typically, if you have bad credit, your best bet is to go with a secured loan. You will generally get a lower interest rate. However, you need to be sure that you can pay the loan back or you could wind up losing whatever asset you used to secure it. If you have any doubts about your ability to pay, an unsecured loan would be a better option.