A loan refers to the kind of money that someone/organization receives from another person/organization so that they can repay back after an agreed amount of time. The borrower usually pays back the principal together with the interest accrued and any additional charges. Loans can be placed into two broad categories, that is, blancolån and unsecured loans. As a reader, you need to understand the difference between these two kinds of loans because it is important knowledge towards achieving financial literacy.
Secured loans are the kinds of loans that lenders extend to borrowers after they provide collateral. The borrower has to provide collateral to the lender so that in case they default in repaying the loan, the lender can sell the item provided as collateral to recoup the amount owed. On the other hand, unsecured loans are the kinds of loans that lenders extend to borrowers without the latter providing collateral. The difference between the two kinds of loans seems very simple and basic, but you should understand that that’s not all. There are several other differences that you should know about.
Money lenders have to endure a huge risk when they give our loans to people because borrowers have a tendency of defaulting on their loan repayments. As a result, lenders have to find ways of mitigating the risks associated with borrowers who default and one way they do that is to ask borrowers to provide assets to protect the loan. The loan is therefore extended against the asset. Assets that are used as collateral for loans need to have a universal financial value that is greater than the amount of money extended in loan. For instance, if a person needs to borrow a loan to buy a house, they will be required to pay a deposit and monthly payments. If the borrower defaults in their payment, the lender can take the home and sell it to recover the money owed in loan.
There are several advantages associated with secured loans including the fact that they attract lower interest rates. The collateral provided for the loan is the reason why secured loans don’t attract such high interest rates like unsecured do. Also, you can borrow much more when the loan is secured than when it is not. Therefore, borrowers of secured loans get the advantage of being able to borrow more money to fund their projects. Repayments terms are also typically longer when the loan is secured than when it is not. Since the lender doesn’t need to worry about you paying back the loan, they will allow you to take a little longer to repay the loan. After all, they know that if you default, get sick, or even die, they can just sell the asset you provided as collateral to recover the amount owed.
Unsecured loans are the exact opposite of secured loans in that you don’t need an asset to serve as collateral in order for you to receive the loan. Good examples of unsecured loans are personal loans, student loans, and credit cards. The fact that there is no collateral the lender takes means that they take on a bigger risk and to compensate for that, they ask higher interest rates.