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Secured vs. Unsecured Loans: How to Make the Right Choice

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Purchasing a house, funding the college tuition or buying a vehicle typically requires a loan from some bank or private lender, unless you have enough cash to cover the cost. Taking out a loan can be a serious financial commitment, because you will be obliged to give up a portion of your monthly salary until the amount is repaid in full, and failing to do so would cause negative effects. There are two basic kinds of loans: secured and unsecured. Depending on how much you are willing to borrow and on your financial health, each of them has its advantages and disadvantages.

When the loan is secured against something that you own, the so-called ‘asset’, the non-repayment of the borrowed funds would cause the repossession of the asset by the lender or you will have just to sell it to cover the cost of your loan. If you decide to apply for secured loan, your house, vehicle or another item of a high value is more than likely to be taken as an asset.

Unsecured loan is not associated with any asset. The lender relies only on the contractual obligation to pay the funds back.

Things to Consider Applying for a Loan

The choice between secured and unsecured loan depends basically on your needs. Secured loans allow you to borrow more if compared to the unsecured ones. Besides, choosing secured loans you will be able to spread the payments over a longer period of time and the interest rates are typically lower because the lender has your asset as a backup, thus the risk of losing money is low. For the same reason secured loans are usually available for people with bad credit history.

Applying for unsecured loans be ready that the lending criteria may be tighter. You can be charged higher interest rates which are usually based on your income level and credit report.

Unsecured loans are considered to be beneficial to consumers due to the quick availability. Some kinds of these loans may be even obtained in a matter of 24 hours. There are lending companies which make payday loans online and allow you to access the borrowed money on the next day, while the process of taking out secured loans involves much time, paperwork and efforts.

People used to taking loans and making use of various financial services offered on the market. Some products or services may be really helpful. However, there is one thing any consumer should keep in mind. It is very important to be responsible while applying to financial institutions and make wise decisions when choosing a service to use. Keeping control under your finances is a key to financial stability.

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AUTHOR Derek

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

1 Comment

  1. Beside my husband’s remaining student loan, our current loans (mortgage & car) are secured. Interest rates & payment options are just better that way. We plan to keep the new car for many years, and our other older car is paid off – we’re planning on driving that puppy into the ground since the trade in or sale value isn’t all that high. Still, worst case scenario, we could sell it for a couple/few grand if we had to.

    We do however also have an unsecured line of credit. It costs us $25/year to keep it, and having $20K of “OH CRAP THE SHIZNIT HAS HIT THE FAN” credit available makes me feel a little better. We used it only twice – once to pay off our older vehicle (we had to move from the US to Canada for a couple years and couldn’t take the car across the border if we didn’t own it) and once to float a down-payment for our mortgage while we moved money around. Other than that, it’s laid dormant for years. The interest rate isn’t great, but it’s better than most credit cards and isn’t tied to anything we own. With an emergency fund and an emergency line of credit, I can sleep a little better at night.


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