Understanding Unsecured Loans

The process of applying for a loan can be a bit overwhelming. Unless you are familiar with financial terminology, you may find yourself questioning what the differences are between the various types of loans that are available. Knowing which option is best for you starts by first learning a little bit more about some of the common terms used to describe loans.

One of the first things that you should start with is learning the difference between secured loans and unsecured loans. Secured loans are loans that are borrowed against some type of collateral. For instance, when you take out a home loan, the bank uses the home itself as collateral for the loan. That means that if you default on your payments, they have a right to take your home away from you and sell it in order to recoup their money. This process is known as foreclosure.

Understanding Unsecured Loans

The same thing holds true for car loans. Again, the lender uses the car as collateral for the loan. If the owner of the vehicle fails to make their payments, the company that provided the loan can repossess the car and sell it to get their money back.

Unsecured loans, on the other hand, do not have any type of collateral. Instead, the lender gives you the money based solely on your credit history and the likelihood that you will pay it back. If you default on your payments, their only recourse is to take you to court to try to get their money back.

Examples of these types of loans include the majority of personal loans and credit cards. Typically, it is slightly harder to qualify for an unsecured loan than for a secured loan. This is because the lender is taking a significant risk by lending you the money without securing it with any collateral.