Loans and credit agreements can be differentiated into two key groups: secured and unsecured. A secured loan is one in which a creditor has a legal interest in your property, while an unsecured loan is not. Knowing the difference between these two types of loans is key for consumers who are considering any kind of loan.
Unsecurd Loans
You've probably got an unsecured loan in your wallet right now. Most credit cards are unsecured loans. If you don't pay your credit card bill, your creditor cannot repossess your car to make up for the debt. An unsecured loan is one the lender gives you without requiring you to sign over an interest in any of your property or give collateral in case you are unable to pay the loan back.
Secured Loan
While missing a payment on your credit card bills won't risk repossession, missing a car payment will. A car loan, unlike a credit card loan, is a secured loan. When you borrow money, you agree to give your lender an interest in the car, known as a security interest. Thus, if you fail to pay back the loan, the lender knows it can take back the car to secure its payment.
Unsecured Loan Pros and Cons
A secured loan gives the lender more reassurance that even if you are unable to pay, the lender won't be out of luck and won't have to lose all the money it lent you. Because of this, a secured loan, such as a mortgage, typically comes with a much lower interest rate than an unsecured loan. However, defaulting on a secured loan means you may lose your property at a time when you need it the most.
Unsecured Loans Pros and Cons
An unsecured loan's primary benefit is that you don't risk losing your property if you fall behind on your payments. To get its money back on an unsecured loan, a lender has to sue you in court and prove its case. However, this lack of security on the part of the lender usually comes with a price: namely higher interest rates and stricter conditions. While unsecured loans pose less risk to you, they are more risky to the lender, and thus the higher costs.
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