Secured And Unsecured Borrowing Explained

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An important part of borrowing money from a lending institution involves knowing the different types of options available 

When you know the difference between secured and unsecured borrowing you are more likely to make informed decisions.  

What are secured loans? 

For Chad, who owns a property, applying for a secured loan is starting to look more exciting for him, rather than an unsecured loan. He is aware of the risk he is taking by putting his asset on the line. He knows that he needs to make sure that he pays on time otherwise he could lose his property. 

A benefit he is looking forward to is paying a lower rate of interest. 

Chad knows that the type of loan he is applying for will pose a lower risk to the lender. Should he default on any payments the institution will be able to make some of its money back by selling the asset. 

This of course means there is additional risk involved for you as a borrower. If the asset you own is repossessed, it is sold and proceeds are used to pay the loan off. If sales are poor, you will be responsible for paying the difference. 

How do unsecured loans work? 

These are often considered to be straightforward loans. If there are missed payments, this results in damage to your credit score as a borrower. Interest rates are typically higher and are also dependent on factors such as your credit score and credit history. 

For Chad, who has a poor credit record, this type of loan wouldn’t be the ideal solution for his needs.  He would be more likely to have to pay a higher interest rate. 

An unsecured loan is not tied to any of your assets. 

A good credit history and affordability are generally required to qualify. 

Having the option of choosing between secured and unsecured borrowing gives you an opportunity to get the best finance solution for your needs. 

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