So, you’re looking to find out the difference between Unsecured Loans and Secured loans, and what may be the advantages and disadvantages between the two. In todays article we’ll be discussing the simple differences between the two.
Collateral vs No Collateral
The first thing you may want to be aware of is collateral. This is the fundamental difference between the two loans; unsecured loans are loans that do not require any collateral in case you fail to meet your financial obligations, while secured loans are loans that are backed by the borrower and can end in your lender collecting possession of your property in the case you fail to meet your obligations.
The most common types of secured loans are Mortgages and Auto loans where you buy the equity off from the lender plus paying interest. Secured loans are personal loans that are widely available to help consumers make larger purchases they normally couldn’t afford otherwise.
Limits and Interest Rates
The next major difference between the two loans is the interest rates in relation to your borrowing power. You see, while you can get approved for high lines of credit via your credit card, using credit cards to pay off larger purchases is an extremely sub-optimal strategy for financially conservative reasons. In the case of using your unsecured line of credit to make bigger purchases you’ll have to pay back over a longer period of time, the interest rates of 24% or more can dig a big hole to fill even if you could purchase a vehicle or home with it.
That’s why it only makes sense that you would opt in for a secured loan that has interest rates as low as 4% depending on your credit score. Because in the time it takes to repay the loan you’ll have saved tens of thousands, to hundreds of thousands, of dollars with much better terms of repayment, all you have to do is back your purchase by collateral.
So the strategy is use Secured Loans for high and very high purchases.
Failing to Meet Your Financial Obligations
What happens when you fail to meet your financial obligations? Well each scenario is different. When it comes to failing to meet your financial obligation on an unsecured loan, typically the process heads into collections. In collections you will essentially be in negotiation with a debt collector to resolve the remaining debt on your account. It is still your obligation to pay back what you owe, and now you additionally will have a negative remark that will stay on your credit report for up to 7 years unless you look to get it removed.
When in collections, debt collectors have the right to sue you for the amount owed. In the case that judgement finds the debt collector in the right, you will then face similar consequences to a secured loan. Meaning that you may have wages garnished from you, property seized from you, including money in your bank accounts.
When it comes to secured loans, things are quickly able to move into collections should you fail to keep up with your financial obligations. But in case of any devaluation/depreciation along the way most secured loans also have you buy policies to cover the difference which results in additional fees.