In the most basic terms, a loan is when money is lent from one entity to another entity, individual or organization.
Now loans can be a major risk and they come in different kinds:
- Secured Loans
- Unsecured Loans
Just by the name, one would perhaps be inclined towards a secured loan; it’s obviously the one that sounds safer. But what exactly are both of these?
A secured loan is when a loan is backed by an asset. It serves as an assurance to the money-lender, declaring it safe enough for them to trust you. So if a borrower, for whatever reason, doesn’t pay the loan, the money-lending entity can legally seize the asset.
An unsecured loan on the other hand, is quite the opposite of a secured loan. Here, you aren’t required to freeze any assets, it’s quite the money-lender’s risk. There are no assets to recover in case of a default. The borrower is usually thoroughly assessed and scrutinized on basis of his or her financial stability, credit, existing assets, etc, which will verify if the borrower will or will not pay the debt or if he or she can be trusted.
The difference between both is majorly the risk factor. The lender faces an extremely high level of risk while providing someone an unsecured loan while one that’s secured is basically a guarantee card.
To be approved for an unsecured loan, you don’t need a stable income or valuable assets whereas for a secured loan, you usually require a good credit history and a stable income.
Another difference between the two is that the interest rate is usually higher for unsecured loans, this in a way promotes secured loans as they have lower rates. One should also pay attention to repayment periods, etc.
As secured loans are backed by collateral’s, they are usually easily approved in comparison to unsecured loans, with less scrutiny of the borrower, while for unsecured loans, approval is usually more difficult to attain.
Secured loans are usually provided for a higher sum of money and unsecured loans for a lower sum.
An unsecured loan however, often has stricter terms and more restrictions, fees and penalties whereas, the other is more flexible and has easier repayment.
Secured loans include; car loans, home loans, mortgage loans, loan against property and so on.
Unsecured loans include; student loans, education loans, personal loans, credit cards, credit card loans, bank overdrafts and so on.
When it comes to similarities, the only main point is that secured and unsecured loans are both, a form of money lending. They both provide a borrower, in need of usually a large sum of money, with that sum. This is usually after a series of scrutiny and analysis which is essentially followed in both forms, at varying intensities. They both require the borrower to pay a certain rate of interest and guarantee repayment of the borrowed sum. In addition, they are both risky ventures for a lender or an entity.