Is There any Benefit in Having an Unsecured Loan Rather Than a Secured One?

Loans can be broken down into two types: secured and unsecured. A secured loan is a loan that is backed by collateral. In the event that the borrower defaults on the loan, then the lender can seize the collateral as compensation. An unsecured loan is a loan that is not backed by collateral. Although unsecured loans typically carry higher rates of interest than secured loans, they have several advantages to the borrower.

Less Complicated

In many cases, taking out an unsecured loan is easier and quicker than taking out a secured loan. This is because when a person takes out a secured loan, the lender will often have to do research into the asset being used as collateral. The lender will often choose to have this asset assessed and appraised. By contrast, an unsecured loan includes none of this verification, which can often allow it to be approved faster.

Assets Not Tied Up

Another large advantage to the borrower is that he does not have to turn over any of his assets to the lender. While some secured loans, such as car loans and mortgages, do not require the borrower to allow the lender to hold the collateral until the loan is paid off, some do. For example, when a borrower uses a secured credit card, he must keep a cash account with the lender.

More Difficult to Collect

Unsecured loans are often harder for the lender to collect on in the event that the borrower does not pay off the loan. When a loan is secured by collateral, the lender will often have the right to simply seize the collateral in the event that the borrower falls behind in his payments. By contrast, to forcibly seize assets for an unsecured loan, the lender will first have to sue the borrower in court and win.

No Seizure of Property

In the event that a lender does file a lawsuit against the borrower and receives an award of damages from a judge, it is very unlikely that he will be able to seize the borrower's property if the loan is unsecured. While the lender could, theoretically, garnish the borrower's wages or seize money from his bank account, it would be extremely difficult for him to seize physical assets from the borrower.