Introduction
Essentially there are two types of loans: secured (i.e. mortgages, pawn loans) and unsecured (i.e. credit cards, payday loans). It is important to understand the difference between these 2 types of loans, including both their advantages and their disadvantages. This information will allow you to be able to determine which is right for you.
The Difference Between Secured And Unsecured Loans
An unsecured loan is a loan that you do not put collateral down for. This means that if you default on an unsecured loan the lender will not have any collateral to take. Therefore, they have to use other methods in which to collect upon the loan. For instance, they may mean getting a judgment for the loan’s amount and attaching this to the borrower’s wages.
Advantages And Disadvantages To Unsecured Loans
As with anything else in life, there are both advantages and disadvantages to getting an unsecured loan. It is really important to take some time to think through these things in order to consider whether or not this type of loan is right for you. Only then should you ever go out and get any type of loan.
The main advantage to getting an unsecured loan is that the borrower does not have to pledge specific property for collateral. However, when a borrower defaults on an unsecured loan the lender will report it to a credit-reporting agency but will take very little other action. So, even if a lender were to sue the borrower in order to get a judgment, the process will take so long that the borrower will actually have time to work out a repayment plan. Another advantage is that borrowers with good credit can quickly and easily get an unsecured loan.
The main disadvantage to an unsecured loan is that the interest rates are usually a whole lot higher than they are for secured loans because lenders have less risk whenever there is collateral attached to a loan. Another disadvantage is that when a borrower defaults it can take years to collect on the loan since all they can do is make collection calls and send letters. On the other hand, whenever a borrower defaults on a secured loan the lender can seize the collateral in order to repay the loan, thus putting a quick end to the process.
Types Of Unsecured Loans
There are 2 different types of unsecured loans. These include installment loans (i.e. a personal loan that you take out from either a bank or a credit union) and revolving loans (i.e. a credit card). With an installment loan you, as the borrower, will receive a specific amount of money. In return you agree to make specific payments on specific dates. On the other hand, with a revolving unsecured loan you will have access to a line of credit. You will be allowed to use as much or as little of this line of credit as you need. The payments on revolving loans will vary depending upon just how much of the credit line you choose to use. Clearly, there are both advantages and disadvantages depending upon which type of unsecured loan you choose to take out.
