A:

Secured loans are better for the borrower than unsecured loans because the loan terms are more agreeable. Often, the interest rates of secured loans are lower and the repayment periods are longer. Secured personal loans are typically the best and only way for borrowers to receive large sums of money; the “secured” aspect implies there is a guarantee the loan will be repaid.

Secured Loans and Collateral

Typically, the way this security is enforced is through a form of collateral such as a house, car or other form of valuable personal property. Secured loans may also be ideal because they come with lower interest rates, higher borrowing limits and longer repayment terms. Examples of secure loans include mortgages, home equity lines of credit, or automobile, boat or recreational vehicle loans.

Unsecured Loans and the Lending Perspective

Unsecured loans are often used for credit cards, personal loans, personal lines of credit and student loans. Unsecured loans are more expensive for the borrower in the short term because most of the risk is shouldered by the lender; if the debtor fails to pay back the loan, the lender is unable to take possession of the borrower's assets as a way of paying itself back.

Secured loans offer more advantages, but the risk is leveraged on to the borrower. Access to collateral is not always available, in which case unsecured loans may be the only option. However, because risk is carried disproportionately by the borrower, secure loans are preferable for lenders. If the borrower meets the minimum requirements, lenders are often eager to extend secure loans.

RELATED FAQS
  1. What is the difference between secured and unsecured debts?

    The differences between secured and unsecured debt, and how banks buffer risks associated with each type of loan through ... Read Answer >>
  2. What are the typical requirements to qualify for closed end credit?

    Learn what closed-end credit is, and the various requirements that borrowers must meet in order to obtain a closed-end credit ... Read Answer >>
  3. What are the pros and cons of life insurance policy loans?

    Find out the pros and cons of borrowing against your life insurance policy to help you decide if this loan type is the right ... Read Answer >>
Related Articles
  1. Personal Finance

    Home Improvement Loans: What Are Your Best Options?

    If you plan on taking out a home improvement loan, you should know what your options are and which ones might be best for your situation.
  2. Retirement

    Business Owners: A Guide To Qualified Retirement Plan Loans

    Thinking of adding a loan feature to your company's plan? Here's what you need to know.
  3. Managing Wealth

    Personal Loans: Compare the 6 Biggest Banks

    Need a personal loan? You may stop by one of these big banks for help. Their offerings vary in size, rates and loan types, which means you have options.
  4. Personal Finance

    Student Loan Asset-Backed Securities: Safe or Subprime?

    Similar to the mortgage-backed securities that caused the 2008 recession, student loan asset-backed securities could lead to the next financial crisis.
  5. Personal Finance

    College Loans: Private vs. Federal

    Not all student loans are the same. Know what you're getting into before signing on the dotted line.
  6. Tech

    Good Credit? Try This Credit Card Alternative

    Personal loans are a credit card alternative to try if you've got great credit and you want to lock in a lower interest rate on what you borrow. [underlined word is credit card alternative]
  7. Personal Finance

    What Is Collateral?

    Collateral is property or other assets that a borrower offers a lender to secure a loan. If the borrower stops making the promised loan payments, the lender can seize the collateral to recoup ...
  8. Personal Finance

    Personal Loans: Consider These Alternative Lenders

    Looking for an alternative source of financing for a personal loan? Take a look at these companies.
RELATED TERMS
  1. Loan Stock

    Common or preferred stock shares that are used as collateral ...
  2. Loan Commitment

    A loan commitment is a loan that may be drawn down or is due ...
  3. Character Loan

    A character loan is a type of unsecured loan that is made on ...
  4. Collateral

    Collateral is property or other assets that a borrower offers ...
  5. Direct Consolidation Loan

    A loan that combines two or more federal education loans into ...
  6. Standing Loan

    A type of loan where payments are made of interest only. Repayment ...
Hot Definitions
  1. Donchian Channels

    A moving average indicator developed by Richard Donchian. It plots the highest high and lowest low over the last period time ...
  2. Consumer Price Index - CPI

    A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, ...
  3. Moving Average - MA

    A moving average (MA) is a widely used indicator in technical analysis that helps smooth out price action by filtering out ...
  4. Stop Order

    A stop order is an order to buy or sell a security when its price increases past a particular point in order to limit losses ...
  5. Inflation

    The rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of ...
  6. Candlestick

    A chart that displays the high, low, opening and closing prices for a security for a single day. The wide part of the candlestick ...
Trading Center