Choosing an Unsecured Loan

Secured Loans vs. Unsecured Loans

Borrowing money to purchase items a person needs or desires that require a large sum of money is a very common thing. Most people throughout their life span are paying off a car loan or a home loan, because most people’s bank accounts do not hold the sufficient funds to buy these items using cash. When a person chooses to take a loan out in order to purchase an item of their desire they have two types of loans to choose from: secured vs unsecured loans. The one thing both types of loans have in common is that a person is borrowing money with the intention to pay the money, plus interest, back to the person or institute that the money is borrowed from. What is the difference between the two types of loans?

Secured Loans

• In a secured loan, the loan is given with the stipulation that an asset could be seized and sold if the loan is not paid. The asset is used as collateral for the loan.  Request items used as collateral are houses, land, cars and jewelry.  A common type of secured loan is a mortgage.  If the mortgage is not paid, the house can be repossessed by the bank. The bank can then sell it.

Unsecured Loans

• According to Investopedia, an unsecured loan “is issued and supported only by the borrower's creditworthiness, rather than by some sort of collateral."  Unlike a secured loan, an unsecured loan does not require backing by assets.  It is usually based on the credit history of the borrower and the borrower's ability to repay. A common type of unsecured loan is a credit card. Other types of unsecured loans are personal loans, lines of credit and bank overdrafts. Some examples of unsecured loans include: credit cards and personal loans.

Deciding on an Unsecured Loan

Once you decide to choose an unsecured loan over a secured loan, the unsecured loan has benefits. A major benefit is that if you are unable to pay back the loan at any given time the creditors cannot take any of your personal property. For example, with a secured loan if you cannot pay a car payment the creditors can reposes the car.  Banks and credit unions are examples of establishments that are willing to give the right person (good credit and income history provided) a loan for a person to acquire items they need that they cannot pay the full amount for. The time frame for paying back an unsecured loan varies from place to place. 

These types of loans do not require collateral, which is good for people who have yet to acquire any assets. The requirements generally to be approved for an unsecured loan includes: the applicant must be at least 18, be working currently and have an active bank account. The main benefit for most people is the idea that they will not lose any important assets if the loan goes into default. Choosing an unsecured loan can also help you build a credit history if you are a young adult for future purchasing power. With the right company an unsecured loan will help you achieve the items you need to live a happy and fulfilled life, without the pressure of becoming a millionaire. 

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