What is difference between secured and unsecured loans?
- Posted:
- 3+ months ago by coreyclar...
- Topics:
- finance, loans
Responses (4)
A secured loan is one which you borrow money against something of value you own, a good example being a mortgage where the money is lent to you against your house. It offers saftey to the lender because if you for some reason can't pay, he can get back by selling the house (known as repossession). You however will benifit with lower interest payments for the reduced risk.
Unsecured loans do not require an asset, but is against a legal contract between lender & borrower. This is a more expensive way to borrow due to the higher risk to the lender upon seeing his money back!
A "secured" loan means, when you take a loan, you give something of higher value as "collateral" or guarantee to the lender which he can sell or auction away if you default in your repaying the loan. On the other hand "unsecured" means, you get a loan without any guarantee of repaying it to the lender in which case, should you default, he cannot do anything to recover it, and repayment depends on your decency. He can of course take you to court if there is proof that he had lent you something and you had agreed to repay it within certain periods.
Secured loans require collateral, such as a house or car, which the lender can seize if you default on the loan. These loans typically offer lower interest rates because they pose less risk to the lender. Common examples include mortgages and auto loans.
Unsecured loans do not require collateral and are based on your creditworthiness. Since they are riskier for lenders, they often come with higher interest rates. Examples include personal loans and credit cards.
Understanding the differences between these loan types can help you make informed financial decisions. For expert advice and tailored loan solutions, visit our website, NZ Mortgages.