WHAT IS THE RIGHT OPTION FOR YOU? UNSECURED LOANS OR SECURED LOANS
As a borrower, you may be flooded with borrowing options. A lot of options can put you in confusion about choosing the best suitable option for you.
If you are looking for personal loans, you have only two options that differ in terms of their interest rates, repayment terms and conditions and other essential factors.
The two types of personal loans are Secured Loans and Unsecured loans. Among the two options, you have to choose the right one for you to take advantage of your loan.
Which is better-Unsecured or Secured?
While borrowing a loan, a lender or a creditor gives you the loan amount and charges interest on that principal amount.
Going by the literal meaning of borrow means taking money from an individual or an institution under an agreement with the promise of paying it back later.
These days there are a plethora of loans options available in the market, such as Car loans, wedding loans, payday loans, Instant loans and many other options.
All these loans are categorized under two broad options, i.e. secured loans and unsecured loans. The nature of the loan depends on the lender or the financial institution.
Some people are defaulters and face difficulty in borrowing. For such people, many lenders offer personal loans for bad credit. These loans are a good option in case of a bad credit score.
A secured loan, aka a secured debt, is a loan that the lender offers in return for an asset or collateral. The borrower has to pledge some form of collateral or asset to get the loan amount.
It should be a valuable asset such as a car or property or your home. Keeping your asset helps you get a considerable amount of money in return, and the lender has the security against you are the loan offered to you.
The basic concept behind this loan is that if you fail to repay the loan, the lender can recover the amount by keeping your collateral and selling it in the market.
Moreover, it is terrifying and a nightmare to lose your asset, so it acts as a stimulus to pay back your loan on time and with a proper interest rate.
Types of Secured Loans
There are many types of secured loans offered by the lender, but people mostly borrow only types that are listed below:
- Auto Loans
An auto loan is also known as a vehicle loan. It falls under the category of personal loans. It is borrowed in case of buying a vehicle by the borrower.
Once the loan is borrowed, the borrower pays back the loan as monthly instalments. The borrower purchases the vehicle in the form of collateral in return for the loan borrowed.
If the borrower is unable to make the repayment, the vehicle is confiscated by the lender to recover the loss.
The borrower does not own the vehicle fully till the time he pays back the entire loan amount, including the interest rates. When the borrower makes the total amount, he holds the vehicle thoroughly.
- Mortgage Loans
To buy property, individuals borrow mortgage loans. The loan value is secured on the value of the home purchased. Just like the auto loan, if the lender fails to make the payment, the lender or the creditor can sell off the house to resale it to recover its remaining loan amount.
With the fear of losing out on the home, the borrower is bound to pay back the loan amount to the lender.
Other Collateral types used for a secured loan
As mentioned above, collateral is pledged by the borrower in return for the loan amount received by the lender.
It acts as a promise by the borrower to the lender for paying the full amount on time else. The lender can possess the asset and sell it in the market. This is also known as asset-based lending.
- Real estate such as land, property, home
- Vehicles such as motorbike, car, or any of your automobile
- Bonds such as investment accounts, mutual funds, stocks
- Others include savings or cash, valuables (jewellery, fine art), certificates of deposit accounts, insurance policies.
The collateral depends on the amount that you are borrowing and its repayment duration.
Unlike secured loans, unsecured loans are borrowed without mortgaging any asset or collateral and are termed signature loans.
These loans do not involve any risk of collateral damage. In this case, if the loan amount is not repaid, the lenders have to bear the risk of nonpayment.
The only loss borrower has to face is the risk of credit score as few points are toppled from the credit score.
Upon nonpayment of the loan amount, the credit score of the borrower goes down and is likely to face a problem in getting the loan in the future.
Types of Unsecured Loans
Unsecured loans are of types: instalment loans and a revolving line of credit. An instalment loan can be further categorized into two types:
- Variable-interest rate loan- The monthly repayment amount varies and depends on the market trend and the lender.
- Fixed-interest rate loan- The monthly repayment amount is fixed.
Various types of unsecured loans
- Credit Cards
A credit card comes under the revolving line of credit. On a credit card, the spending is fixed, and you can use that amount to fund your expenses. The payment has to be made on the due date set by the financial institution.
- Wedding Loans
Couples often borrow wedding loans to fund their wedding expenses. Wedding loans are unsecured loans and are a good option to plan the perfect dream wedding.
- Debt Consolidation Loans
Many borrowers borrow unsecured loans in the form of debt consolidation loans. Many people struggle with multiple loans at one time.
This loan helps them to consolidate all their debts and narrow them down to one single loan. It is an excellent way to save money and pay one single loan instead of multiple loans.
The right way to choose your loan
There are many factors to decide the best suitable loan for you. You need to understand the fundamental difference between the loans, weigh your situation, and choose the right one.
The purpose of your borrowing, interest rate and your credit score are other significant factors to decide the type of loan that you want.
The most critical factor in a loan, regardless of its nature, is the timely repayment of the loan. If you repay your loan on time, it will help you be in the lender’s good books and improve your credit score.
It is advisable not to borrow an amount that you cannot afford to pay back in the future. Instead of credit cards, you can go for a loan option as they have relatively lower interest rates and monthly instalments.
Before borrowing a loan, plan your finances well in advance and have a clear picture of your financial status.