Secured Loans Versus Unsecured Loans - Understand The Differences

Secured Loans Versus Unsecured Loans - Understand The Differences

A consolidation loan can be used to settle multiple bills, enabling you to focus on one payment for ease of debt management. But, which type of loan should you apply for? What are the advantages and disadvantages of these consolidation loans? You need to know them before you start to find a suitable loan for debt consolidation.

Basically, there are two types of debt consolidation loans: secured and unsecured loans. Let's explore each of them:

Secured Loans

The borrowers who are applying for secured loans need to attach their application with collateral. The common types of collateral are houses, boats and lands. The ownership of the assets are transferred to the lenders until the secured loans are paid off. The approved loan amount based on the asset equity, generally 70% up to 85% of the equity value. Since the lenders can execute foreclosure on the asset if borrowers fail to pay their loans, their risk are lower. That's why the interest rates of secured loans are much lower than loans without collateral.

Secured loans require the borrowers to pledge their assets as collateral. It is a good option to get a loan at low interest rate for debt consolidation and get rid of the expensive debts such as credit card balances. A secured loan may put your home at risk of foreclosure if you can't afford to pay the loan due to any reason. Hence, before securing the loan with your home as collateral, you have to make sure that you are capable of making the loan repayment on time each month until it is paid off.

Mortgage refinance loan and home equity loan are the two common secured loans that you can borrow against your home. If you are in process of paying a mortgage, you can go for a mortgage refinance option. It is a way of getting a new mortgage to settle existing mortgage and use the balance of the loan to pay toward the high interest rate debts. Alternatively, if your home has built up equity, then you can apply for a home equity loan and use the loan to pay off the high interest rate credit card balances and personal loans. In fact, the home equity loan is very similar to personal loan, but at low interest rate as it is a loan that secured against a home. Different from mortgage refinance that you have to use the new loan to pay off the existing mortgage, 100% of home equity loan can be used for debt consolidation purpose.

The unsecured loans

Unsecured loans do not need any collateral and lenders are approving the applications based on the applicants' credit history. The interest rates offered in unsecured loans are dependent on the credit rating, the higher the score, the better the rates are. The approved amount is based on the repay capability of borrowers. Since the lenders don't hold the ownership of any asset, they carry higher risk and they only can take a legal action if borrowers default the loan. The unsecured loans carry higher interest rates compare to the secured version. Most personal loans offered in the market are a type of unsecured loan. The applicants need to submit the proof of their financial capability and other supporting documents in their application. Lenders will request the credit reports from credit bureau to review the applicants' credit history, if lenders found that the borrower is in high risk of failing to pay a loan due to bad credit, they may not approve their applications; or they may request the borrowers to get one or two co-signers with good credit history to co-sign the loan in order for them to approve the application.

Summary

Basically, there are two types of loans, the secured and unsecured loans. You should review the pros and cons of them before you decide the best type of loan for debt consolidation.

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