When you need to borrow money, you need a loan from a bank or other financial institution in order to make that happen. You might soon discover that loans break down into two types: secured loans and unsecured loans.
Secured loans are financial credit where some kind of physical collateral is involved. Mortgages are one common example, where the bank technically owns the home while the homeowner pays down the home loan. Cars are also often financed through secured loans, as defaulting on a car loan can mean the car gets repossessed. Items pawned off at pawn stores are very similar, as any pawn loan not paid off means that the pawn shop keeps the item borrowed against and gets to sell it to recoup their monies.
Unsecured loans are different. These are loans that are issued and entirely supported only by the assumed creditworthiness of the borrower. The financial institution establishes this through checking out the borrower’s credit score, looking through their previous financial records and history, and confirming the information on the application.
Unsecured loans do appeal to consumers since collateral doesn’t have to be put up, but because these loans are not guaranteed for the lenders, they make things a little harder. Minimum credit scores are often in play, and interest rates are typically higher than the lower interest rates found on car loans and mortgages.
Deciding between unsecured and secured loans can sometimes be a hard choice, but not always. In the case of cars and homes, you only risk losing the very property you are trying to buy. In the case of pawn shops or emergency title loans, you might risk losing property you are used to having. Unsecured loans are more expensive overall, but come with less risk of negative consequences.