Choosing a Secured or Unsecured Loan

March 12, 2009 by  
Filed under Debt Handling

When you need financing for a purchase or improvement to existing property, you’ll be faced with the question of whether to apply for an unsecured or secured loan. In addition, the proposed lender will need to determine whether to require security against the loan in order to approve it. There are pros and cons associated with each type of loan, and you need to be familiar with them before going forward.

Secured loans are issued with the guarantee of some type of property. This may be a home, automobile, or other item of value like jewelry or a computer. With this type of financing, the lender has a claim against ownership of the property should you ever default on or fail to repay the loan.

However, this doesn’t simply mean that if you’re late on a payment your bank will come marching to your door to kick you out of your home. Foreclosures and repossessions of properties cost money and require a very long, drawn-out process, so don’t fret if you have a difficult month or so.

When a borrower defaults on a loan, the lender is likely to start sending strongly-worded letters looking for payment. At this time, it may be possible to work some type of payment deal out with your lender, but you should realize that they still have a claim against your property should you ever sell it. When you sell a property that is used to secure a loan, the loan must first be paid off before you get to profit any proceeds. This is referred to as the equity in your home or auto.

Unsecured loans are the complete opposite. They are issued on your good name alone, and are typically only available to those with great credit histories and a positive current financial position. There are many advantages to being able to obtain this type of loan.

If the lender is confident you have the means and ability to repay an unsecured loan, they will be more likely to issue it. A lender may also look at an application for an unsecured loan and require you to provide security as a condition of issuance.

Unsecured loans are much like credit card debt, in that the lender has no legal recourse should you default. They can send you to a collection agency and ruin your credit rating, but can never take possession of anything you own as a condition of the loan.

However, rates tend to be lower for unsecured loans versus credit cards. In addition, secured loans will provide lower rates than unsecured loans due to reduced risk. It is always best to pursue an unsecured loan for unforeseen expenses due to this fact; obviously, a home or auto purchase will require a secured loan.

In order to protect your credit rating and maintain a positive debt management program, always apply for an unsecured loan before using a credit card for unexpected or planned for expenses. If you can’t get approved, you should probably just avoid the expense at all cost.