What to choose : secured or unsecured loans
What to choose : secured or unsecured loans
No matter the type of the financial need, it's always best to analyze carefully the situation before taking action. This way you have bigger chances in finding the money with the lowest cost.
First of all, loans divide into two great categories: secured and unsecured loans.
The difference is given by the fact that secured loans will require a collateral that guarantees the lender doesn't lose his money if the borrower fails to make the repayments. Unsecured loans do not need a guarantee.
Loans can be secured by many assets: by a house (mortgage) ,by a car (secured auto loan) and even by money (cash-secured loan). The lender holds a lien over the property and in case the borrower defaults he is entitled to sell it to recuperate his money.
Because secured loans are backed-up by some asset, lenders will be more willing to give money. The amount lent is related to the value of the collateral, and can reach up to 75% of its value. For example, if you take a loan and use your car as a collateral (value of 10 000$) you can get as high as 7500 $ . This figures can give you just an idea, because the percentage varies from lender to lender. Secured loans can be your first option if you need a big amount to borrow and you own a collateral that you are willing to put against the loan.
Since secured loans are usually big amounts, they are granted for long periods of time, up to 30 years. Because you secure the loan, you can negotiate the terms and get low interest rates. On the other hand, even though you pay small amounts each month (they are calculated considering your income and other debts, but usually they are tolerable and leave you with cash for other expenses), the interest accumulated over the long life of the loan is significant in value.
Unsecured loans are a type of loan designed for people looking to borrow but without the possibility to secure the loan.
This type of loan is a high-risk loan for the lender and therefore is more expensive. The lender has nothing than the borrowers signature on the papers. In the unfortunate case the borrower fails to repay, the lending company must initiate legal procedures and go into court. That is why the decision to approve the loan is taken after carefully analyzing the customer's financial history and credit rating. The amount approved is influenced by more than a few factors, amongst which are: age, citizenship, income, other debts and marital status.
Due to high risk associated with them, unsecured loans might not be your best solution in terms of rates and conditions. Rates are usually high and repayment period fixed.
In terms of cost, secured loans are cheaper and more flexible. In terms of risk unsecured loans have an advantage, as there is no asset at risk.
Overall, secured and unsecured loans can't really compete as they don't target the same customer segment. They are designed for different customers with different needs and possibilities.