The key difference between secured and unsecured loans is that secured loans are collateralized with an asset the creditor can use to recoup the cost of the loan if the debtor defaults. The presence of collateral tends to make lenders more likely to offer favorable lending terms, including a good interest rate and lower fees associated with the loan. In addition, people can take out more money on a secured loan, as the creditor is less worried about what will happen in a default. Furthermore, in the event of a bankruptcy, secured loans take precedence over unsecured loans, and unsecured creditors only get paid after the claims of secured creditors are settled.
People can usually apply for secured and unsecured loans through banks and other financial institutions. Some examples of secured loans include mortgages, car loans, and home equity lines of credit. Unsecured loans are commonly personal loans, taken out to cover general expenses. People can offer a variety of things as collateral, including homes, cars, and titles to other assets like stocks and bonds, depending on the terms at the lender.
Some types of loans will not be made without an asset to secure the loan, for the safety of the lender. People who lack access to assets cannot obtain these kinds of secured loans. Other loans may be available in secured or unsecured form, leaving people with a choice. Providing collateral can allow people to access better loan terms, but they also run the risk of losing that asset if they stop paying the loan or go into bankruptcy. This should be considered carefully when evaluating financing options like secured and unsecured loans.
When secured and unsecured loans are made, they both come with detailed contracts discussing the amount of money being loaned and the terms. The contract should be carefully reviewed to make sure the terms are understood. One thing to be careful of is bans on using the same asset to secure multiple loans. If someone has a mortgage out on a house with the house for collateral, for example, that person cannot use the house to back another loan with a different lender, because it is already pledged to the first lender.
Another thing to be aware of with secured and unsecured loans is the importance of making sure lenders release all claims on an asset once a loan is paid off. People should receive a copy of the new title, showing that the lender no longer has a lien on the asset. Liens can complicate sales of assets in the future and could also expose people to the risk of losing the asset if there is a catastrophic paperwork error and a lender mistakenly repossesses an asset.