Secured and Unsecured Loans: What is the Difference?

If you are looking to borrow money, there are a variety of options available, depending on each company or bank. However, the two main types of loan are known as "Secured Loans" and "Unsecured Loans".

Secured Loans

Secured loans are loans that have a guaranteed collateral.  If you default on the repayments, the bank or loan company can seize the asset you agreed upon using as collateral. Secured loans often have lower interest rates than unsecured loans, due to the lender having more of a guarantee. Usually, with this kind of loan, the loan company or bank will send out a representative to appraise the value of the collateral item (such as your home, if you need to arrange a refinance mortgage rate). The benefits of a secured loan include: easy to obtain and cheaper interest rates (usually). On the down-side, if you apply for a secured loan and it is refused (such as if you request to borrow a higher sum than your collateral is worth), it will show up on your credit report, which reflects badly on your credit history. It is best to make sure that what you intend to use for collateral is of a high enough value, or else request to borrow a smaller sum of money.

Unsecured Loans

Unsecured loans have no collateral if the borrower defaults. This type of loan poses a bigger gamble to a loan company or bank, so it is more difficult to obtain than secured, and will usually have higher repayment interest rates. The lender will base its decision on your income and credit history, to assess risk and work out if you qualify for the loan. The benefit of an unsecured loan is that it removes the risk of having a lender seize an asset if you default on repayments (however, defaulted loan repayments will show up on your credit history).  The advantage of an unsecured loan, unlike a secured loan, is that the borrower has freedom to use the money in any way they wish. Lenders do not restrict what the money can be used for or add additional clauses to the loan agreement stipulating how the money should or should not be used.  Unsecured loans can be freely used for practically any personal purpose. Note that if you have poor credit history, your loan will likely either have higher interest payback rate place on it, or declined outright.

A Word of Caution

There are many unscrupulous loan companies around, or "loan sharks" (unofficial unregulated lending companies or individuals), promising guaranteed loans regardless of your credit history. These companies and individuals usually charge astronomical rates of interest. Make sure you read the small print carefully, so you are aware of all the important clauses. You may find the best way to protect yourself with this kind of loan company by deciding not to choose them at all! However, if for any reason this is your only option, make sure you are aware of exactly what you are getting yourself into. In the case of loan sharks, they may enforce defaulted payment via blackmail or threats of violence. Be very cautious about approaching this kind of money lending outfit, for you may end up with worse problems, and in much worse debt than when you started.

For working out which is the right loan, work out first what you can afford to pay. Look around for the best mortgage calculators and other ways to work out your finances, to work out your best loan and refinance mortgage rate.

Rule of thumb is that usually, if it seems too good to be true, then it is! Always exercise caution.

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