When it comes to loans, some terms are pretty confusing and difficult to comprehend. Some loans are given out to you without any collateral known as unsecured loans whereas some need some collateral and are termed as secured loans. In this piece, we will try and understand the difference between unsecured and secured loans.
Difference Between Unsecured and Secured Loans
Getting a loan is not easy. There are a lot of prerequisites one has to meet and a lot of documentation involved. Hence, knowing about the loan types is important as you get a better idea of what would be required as per the loan type you are applying – unsecured or secured. Let us point out the differences between the two in detail.
Unsecured Loans
An unsecured loan is a loan that is given to individuals without any collateral or any kind of security. In this case, the lending decision is made on a lot of factors which are as follows:
- Creditworthiness – This is the first thing that the lender would check when you apply for an unsecured loan in the form of a personal loan or a credit card. Your creditworthiness is determined through the credit scores obtained from credit unions. Your credit scores are determined by your payment history, your debts and other important information that determines your financial health.
- Debt to Income Ratio – Though this plays an important role in making a good credit score for you, this is an important determinant of whether you have the ability to borrow on the basis of your current income and the debts that you may have.
Apart from that lenders would check and scrutinize a lot of other things before making a lending decision in case of an unsecured loan. It is difficult to get approved for an unsecured loan as lenders and banks are at high risk and are therefore reluctant in easing the norms in most cases.
Secured Loans
A secured loan is a loan that would need to be attached to some object or thing of value known as collateral which is used as a security against the loan given to you. And hence the name secured. A home loan is a secured loan as the collateral for the home loan is the home itself. Similarly, your car loan is a secured loan as in case you are unable to make the payments the money would be recovered with the sale of the car.
Secured loans are easier to obtain and get approved for as the loans are advanced against collateral or security and therefore they are at minimum risk. Though before making a lending decision the lender would be checking your credit scores and history but a few missed payments here and there or a patch of bad credit may not impact your secured loan. Though, the decision is completely based on the lender.
The Conclusion
The difference between unsecured and secured loans is thus clear and if you are looking forward to applying for any such loan this article should come very handy. Go through this piece to learn some important terms before you get approved for a loan. Although, you should know that you may be in a place where you need a bail bond wherever you are whether it be in North Carolina or not, if your loans go unpaid for a period of time. If you find yourself in this position, make sure to contact professionals to help you out.