Understanding the Difference Between Secured and Unsecured Loans

  • Posted 21 May
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Understanding the Difference Between Secured and Unsecured Loans

If you want to borrow money to start a business, make a major purchase, or go on holiday, in most cases you’ll have two types of loan to choose from. Loans can be either secured or unsecured, and both can be useful in the right situation.

So how do you know which loan will best meet your needs? This article looks at the two options and the pros and cons of each.

 

Secured loans

Secured loans protect lenders by offering collateral. This is standard for home finance loans, where the buyer signs ownership rights to the property over to the lender. The lender then holds the title deed until the loan is completely paid off.

This arrangement benefits lenders, because they carry less risk in the event of a buyer defaulting on a home loan. In case of non-payment, the title reverts to the lender.

A secured loan doesn’t have to be used for a physical item you’re purchasing though. For instance, if you have equity built up in your home you can borrow against it to pay for a family wedding, start a business, or invest in upgrades and remodelling.

The drawback, of course, comes if you fail to repay. If you default on your home loan, the lender can confiscate your house and sell it to make back the money owed on the loan.

So how do secured loans benefit borrowers? In most cases, you’ll be able to get a secured loan at a lower interest rate than an unsecured loan. Depending on the amount you are borrowing and the length of the loan, even a small different in rates can save you hundreds or even many thousands of dollars.

Unsecured loans

An unsecured loan is not tied to any collateral, posing less of a risk to the borrower. If you default on an unsecured loan, your credit rating will be damaged and the lender will take steps to collect, but they cannot confiscate your property.

This measure of protection for buyers obviously adds more risk for lenders, and they charge more accordingly. So when should you consider taking out an unsecured loan?

Some types of loans are always unsecured. These include student loans, credit cards, and personal lines of credit. Unsecured loans can also benefit business owners, if they are looking to expand without risking their assets.

Unsecured loans work well for smaller purchases that will be paid back within a few years, because they can be very easy to get. Most unsecured loans are for less than $25,000, and they typically work best for individuals or businesses with good credit ratings and a history of financial responsibility.

If you want advice on a loan that meets your needs and works best for your financial situation, reach out to the experts at Australian Credit and Finance. Contact us to discuss your next car or home loan.

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