SECURED AND UNSECURED LOANS DIFFERENCE

THE DIFFERENCE BETWEEN SECURED AND UNSECURED LOANS

LEARNING TO BORROW AT A YOUNG AGE
two young boys pretending to be piratesLoans are part of our lives, starting from a very young age when we start borrowing things from our friends and family. As we grow up, the process of getting a loan becomes complicated and it involves more planning and consideration. Do not be scared, loans are a serious matter but it does not mean you will not be able to understand it or that you will be stuck paying them for the rest of your lives.

Understanding what we are getting into is the first step towards financial security and smart financial decisions in general. Before deciding what kind of loan you should get, you must understand the key difference between a secured and unsecured loan.

SECURED LOANS
This is a common type of loan, it is secured by an asset, like a house or a car. The bank will hold the title of the asset until the debt is paid.white and green unsecured tab on a computert keyboard This type of loan is the best option if you are trying to get a large amount of money.

When you get a secured loan, the bank will offer you lower rates, the interest rates are usually what makes people miss their monthly payments. The repayment terms are usually longer, a secured loan will guarantee up to many years to repay your debt, unlike the other unsecured type that will give you months or even less. The borrowing limit will also be higher, with a secured loan you could borrow enough money to buy a house or a car.

UNSECURED LOANS
Also known as personal loans, the unsecured loans are supported by the individual’s creditworthiness. This type of loan usually has higher interest rates and the repayment terms are much shorter. Student loans, credit cards, cash loans and personal loans are examples of unsecured loans.

Unsecured loans offer low borrowing limits but is does not mean that they are a better option, if you do not pay the debt in a short period of time, interest rates and penalty fees will substantially increase your debt.

QUALIFYING FOR AN UNSECURED PERSONAL LOAN
picture of a modern audi suvIt is not easy to obtain an unsecured loan from a bank or any lending institution, this is a high risk transaction for the lenders. There is no guarantee that the money will be returned to them so they make the process particularly difficult, this way only the people that really qualify will be able to obtain the loan. The banks usually go through an extensive background check.

To be eligible for an unsecured loan, the borrower must meet a series of requirements.

• Steady income: You must have a provable and steady income. The monthly payments must be at least no more than 30% of your income or less. A steady flow of money will tell the bank that you are capable of paying them back.

• Credit score: This is more important than a high income, if you have a clean credit score the bank will know that you are trustworthy. If you missed a monthly payment on a previous loan, the bank will know and this could be a reason to deny you the loan.

Qualifications: If you can’t get qualified through a traditional lender then your only option may be to go to cash advance or payday loan type lender. Be aware that many people who go down that road end up in an endless debt spiral. Read the fine print of those loans before committing yourself.