Loans usually fall into one of two categories, secured or unsecured. Though we hear the terms all the time, it isn’t immediately clear exactly what they mean or what the differences between the two are. Here we outline some of the characteristics and contrasts between secured and unsecured loans.
– Secured loans are loans where some other asset is held as collateral until the debt incurred is remain in full including any interest and fees. In most cases the asset is the item being purchased, like a car or a home, and in such cases the lender holds the title or deed until the loan is satisfied. These loans are used for loan amounts that involve high amounts of money and usually have lower rates and higher borrowing limits and longer repayment terms than unsecured loans. Examples of secured loans are mortgages and auto loans.
– Unsecured loans are loans given without any collateral and so lenders take a risk when granting them. Lenders have no option to recover assets in the event that a lender should default on their loan so to counterbalance that fact the interest rates on these types of loans are much higher than those on unsecured loans. Examples of unsecured loans are credit card purchases and education loans.
Knowing the differences between these two types of loans makes it easier to see what it means to undertake the responsibility of signing for them and paying them off. Both require that the lendee be sure to pay for their debt in a timely manner so that interest fees and asset seizures can be avoided.