Secured and Unsecured Loans
05/12/10
Loans are of many kinds: loans for car, house loan, mortgage, personal loan, and student loan. All these loans fall under categories of secured and unsecured loans. Secured loans, or what are known as loans against collateral, are the kind of loans that require the borrower to provide some form of security. It is to ensure that in case of payment default by the borrower, the lender can dispose of the collateral and recover his due. Until the loan is completely repaid, the lender has the rights to the items offered as collateral.
The lenders charge low rates of interest for secured loans as their loans are guaranteed by the collateral. The borrower’s credit history decides his bargaining ability. Secured loans usually carry flexible payment conditions providing much leeway to borrowers. In case of default by the borrower, the lender can exercise his right to foreclose on the collateral and recover his money. The borrower could remain in debt for a longer term.
As far as unsecured or non-collateral loans are concerned, borrowers are not obliged to offer their assets to lenders as security. Banks or lenders have to deploy collectors to obtain payments in case of payment defaults in unsecured loans. In such cases, the lender or the bank stands to lose. Hence, they screen the borrower and check his credit history. Borrowers with bad credit history may find it difficult to obtain unsecured loans. Another disadvantage of unsecured loans is the high interest rate charged by the lenders. The rate of interest is higher than that for secured loans. Thus, both secured and unsecured loans have their advantages and disadvantages.
In case of both secured and unsecured loans, just as the borrower checks the credit history of the borrower, it is equally important for the borrower to check out the credibility, terms of payment and reputation of the lender, which will make a lot of difference to the borrower during the period of indebtedness. Thus, both secured and unsecured loans offer the convenience of borrowing money, albeit under different conditions.
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