The times are such these days that one has to borrow money in order to achieve their endeavours as very few numbers of people have enough money saved. However, before you simply go ahead and take a loan, it is vital to understand the options that you have and how each one will work in your situation. To begin with, the majority of loans are either secured or unsecured. Now let’s break both these types down to understand how you can utilize it in your favour.
When one takes a secured loan, the money taken is protected by an asset such as a car or home, which can be used as collateral. This means that the lender will have the deed or title until the borrower has paid the loan in full. The borrower can use other items as well to take the loan, like stocks, bonds, or personal property.
This is the most common way via which people borrow money, especially when needed in large amounts because the lender will give a large sum only when there’s a promise that the amount will be repaid. This is why the lender takes something of equal or more value before giving the loan. If you fail to repay the loan amount, the lender has the power to sell your collateral to get its money back.
Benefits Of Taking A Secured Loan
∙ Lower rate of interest
∙ Can borrow higher amounts
∙ Pay via longer repayment terms
Understand unsecured loan by thinking that it is the opposite of what a secured loan is. Such a loan includes credit cards or personal (signature) loans. In this case, it is the lender who takes a big risk because there is no asset to recover the payment in case of a default and this is why in this type of loan the interest rates are on the higher side. However, if you are turned down for an unsecured loan, you might still be eligible for a secured loan but you must have something of value that could easily cover the loan amount you are applying for.
In an unsecured, the lender believes that you have the ability to pay off the loan because of your financial stability and resources. So, in this case, you will be judged on the five Cs of credit, that is:
- Character – this can include credit score, references and employment history
- Capacity – income that you earn and whether or not you have a current debt
- Collateral – personal assets that you have and can offer to the lender such as a home or a car
- Capital – the amount that you have in savings and investment accounts
- Conditions – the terms and conditions of the loan