At some point, you are going to find yourself in need to cover some expense, whether it is an emergency or just something you need to or want to purchase. When that happens, you might consider applying for a loan.
When things break, you have a sick child or you need need to purchase something for the home and you find yourself strapped for cash, then what? You are left having to borrow some funds, hopefully, when you do, you do so from a responsible and reputable lender.
While there is a multitude of loan offerings, such as home loans, vehicle finance, and personal loans to name a few, they can all be separated into two broad categories; Unsecured and Secured Loans.
Knowing the differences between these two categories can help you choose the right one for your needs.
An unsecured loan refers to any type of debt that is not tied to any asset. This in return increases the risk taken by the lender compared to the risk associated with a secured loan. Unsecured loans are typically also referred to as personal loans or cash loans.
What are unsecured loans normally used for?
Although there are a multitude of things you can use an unsecured loan for, they are normally taken out for smaller expenses, such as;
- Covering unexpected emergency expenses, like a medical bill or vehicle repairs.
- Purchasing consumer products, like kitchen appliances or other household items.
- Paying for student expenses, such as purchasing expensive textbooks or application fees.
What are the disadvantages of an unsecured loan?
- As there is no asset tied to an unsecured loan, due to the higher risk taken by the lender, more often than not, the interest rate will be higher than a secured loan.
- The requirements for an unsecured loan are much stricter than a secured loan, which means you won’t be able to borrow as large an amount as with a secured loan.
With a secured loan, the lender will accept an asset such as your vehicle or home as collateral that you will repay the loan. This reduces the risk taken by the lender, which in return makes it much more affordable for the borrower.
What are secured loans normally used for?
The same as unsecured loans, there are multiple things that a secured loan can be used for, but the most common uses are;
- Financing a vehicle, such as a car, motorcycle, boat or even a private airplane, as the vehicle is used as collateral in securing the loan.
- Financing a home, which is probably the most common and “secure” of all secured loans as the buyer puts up their home as collateral.
What are the disadvantages of a secured loan?
- Even with lower interest rates, longer repayment periods it could mean that you incur more interest.
- Should you not repay your loan, you could lose your home or vehicle.
Unsecured loans are normally used for smaller amounts to purchase or pay for expenses that you cannot afford at that point and have no collateral attached to the loan.
Secured loans are normally used for larger amounts to purchase assets such as a home or vehicle, but have collateral which is normally the asset, attached to the loan.