Life is predictably unpredictable. As a result of this truth, it is highly likely that over the course of your lifetime you may find yourself unexpectedly in need of a financial loan.

Imperative to the success of your loan experience is a working knowledge of the types of loans available to you. You must also recognize the process by which you obtain them as well as a solid plan for repayment.

There are two types of financial loans–secured and unsecured.

Before deciding which loan might work best for you, consider the benefits and responsibilities inherent in each option.

Secured Loans

Just as the name indicates, a secured loan is a financial loan in which something is put forward as ‘security’ or collateral for the loan to ensure repayment. Secured loans often help finance a home or purchase a new car. The bank or finance company holds the deed or title until the loan is repaid in full.

Because a lender is not likely to lend large sums of money without reasonable assurance the loan will be repaid, secured loans are usually the ideal way to obtain a loan for a big-ticket item such as a house, new car, boat or recreational vehicle. A lender will see your home or car as a safe guarantee as you will assuredly do everything in your power to repay the loan for fear of losing the item shored up for use as collateral.

Secured loans are not limited to purchase of a new items such as a house or car. Secured loans also involve home equity loans or a home equity line of credit. These types of secured loans are based on the amount of equity you have in your home. Banks calculate home equity by assessing the current market value of your home minus the amount still owed.

Because more paperwork is involved, secured loans may take longer to process.

Benefits of a Secured Loan 

There are a few key benefits to consider when deciding whether to acquire a secured or unsecured loan.

The borrowing limits for secured loans are generally higher than that of unsecured loans. Secondly, secured loans typically offer lower interest rates than unsecured loans. Finally, secured loans often provide the borrower with a longer period of time for repayment.

Responsibilities of a Secured Loan

If, for whatever reason, you are unable to repay a secured loan, the lender has the right to seize possession of the collateral you offered to secure the loan. For example, in the case of a secured loan used to purchase your car or home, these items may be sold and the funds from the sale used to help satisfy the unresolved debt.

Similarly, failure to maintain timely payments for a secured loan for a home equity line of credit or a home equity loan can result in foreclosure and the possible loss of your home.

 

Unsecured Loans

Unsecured loans are the opposite of secured loans. An unsecured loan does not require something of value or an asset to use as collateral in order to obtain the loan.

Unsecured loans include personal (signature) loans, credit cards, student loans, personal lines of credit as well as loans procured for home improvements. Because there is no collateral involved in an unsecured loan, a lender evaluates your financial resources in order to make a decision about your loan.

The lender’s decision will rest on your creditworthiness. Specifically, the lender will consider your overall willingness and ability to repay the debt as well as general economic factors. Because the lender assumes a greater responsibility for the higher level of risk involved for an unsecured loan, the interest rate is usually higher than that of a secured loan.

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Additionally, the amount that you can borrow using an unsecured loan is lower than the amount you can borrow using a secured loan with the absence of any kind of collateral. The approval process for an unsecured loan is generally faster than that of a secured loan because there is less paperwork involved.

Benefits of an Unsecured Loan

As with secured loans, there are few things to consider when weighing the pros and cons of unsecured loans.

As a rule, unsecured loans have a fixed term and interest rate. This means the loan payment is always the same every month for the duration of the loan. Additionally, unsecured loans have a specific or set amount of time scheduled to repay the loan. Finally, the interest rate for an unsecured loan cannot change over the life of the loan.

Responsibilities of an Unsecured Loan

As with secured loans, if you default on an unsecured loan, the lender has the right to seek compensation to satisfy the debt. This can result in garnishment of your wages or, in the case of student loans, your income tax refund may be seized to repay the outstanding loan.

When In Doubt, Always Ask

Remember, if you do not qualify for an unsecured loan you may still have the ability to obtain a secured loan. This depends on what you have of value or using the item you wish to purchase as collateral. Secured and unsecured loans can vary greatly from lender to lender, therefore it is important to have a good understanding of the process.

AEM Funding is committed to providing customers with optimal financial results and can assist you with any and all questions related to both personal and business funding.

Before you make any kind of decision regarding a secured or unsecured loan, be sure you can afford to pay back your loan on time and as scheduled while avoiding any additional stress to your finances or budget.