Secured and Unsecured LoansEvery individual can avail loans but repaying them involves much responsibility. The availing of loans can reflect on your credit score, and individuals can improve the score with proper repayment. There are two main categories of loans to be understood. The two types are secured loans and unsecured loans. Each of them works in different ways for different purposes. It is essential to understand their purpose and needs.
Secured Loans-When the lender is provided with collateral which can be a personal asset or any greater monetary value for the loan amount borrowed, it is said to be a secured loan. The word secured indicates the security given by the collateral for the lenders. When the borrower defaults in repayment of the loan, the lender will have all the right to confiscate the asset or sell it to make up for the loss. When the individual avails a secured loan, an asset is promised as security for the repayment of the loan.
The borrower can have the asset as well as build the credit score by making timely monthly payments. When there is a failure in payment, the lender will take the asset. When the loan is successfully repaid, the asset is given back to the borrower. Secured loans are said to be of lower risk as the collateral will ensure the lenders no risk of loss. It is very easy to avail the secured loan with a bad credit score as they are secured with a collateral. An individual can borrow a large amount at a low-interest rate and affordable term with secured loans.In the case of default, the borrower will hand over the collateral to the financial institution. The lender holds the legal right to take possession of the asset. The lender will take claim of the security deposit. When the individual defaults on loan, it will bring a negative impact on the credit score. The lender confiscates the asset as a cause of default in repayment will reflect in credit history for seven years.
Unsecured Loans-An unsecured loan will not have collateral attached for security for availing the loan. The financial lender will approve the loan based on creditworthiness and sanction the loan. It is different from a secured loan and slightly difficult for qualifying for the loan. The borrower must have a good credit score and credit history.
The lenders will not have any asset to claim when the borrower defaults in the repayment. The lenders will have huge risk while lending the loan amount. In unsecured loans, the lender and borrower will come to certain terms and condition for the loan process such as tenure as well as interest rates. The approval of the unsecured loan depends on the credit score, and it is essential to improve credit history. Lenders offer unsecured loans with higher interest rates and stricter terms.
When the borrower fails to repay the unsecured loan, the credit score gets affected. With no collateral against the unsecured loans, the borrowers cannot escape the default easily. The lenders will impose fines and high-interest rates for the defaulters. The borrower who defaults in repayment will even be in debt
as the terms are even stricter. The lender, in some cases, will also take legal actions on the defaulting borrower. There are many lawsuits filed against borrowers. Every remark will be listed on the credit history will be a bad reflection on the borrower. The borrower can avail any form of a loan but has to make sure the repayment is made without fail. These loans will help build a good credit score and reshape the credit history. The borrower must handle the loan with maturity as it is a commitment for future loan approvals.
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Shruthi has been working as a content writer in the financial domain for the past five. She has written many articles in the area of finance, investments, deposits, and insurance. She is an avid blogger and is the go-to person for all his friends and family financial advice. She has taken upon the mission to educate the masses on their economic well-being.