When in the market for a loan, you’ll need to diligently analyze all of your available options. Your borrowing amount, current interest rates, repayment terms and your existing responsibilities will have a considerable impression on the decisions you make for your loan.

 And you’ll discover that there are two key loan types (unsecured and secured) with each catering to varying borrowing situations. It is important that you understand the difference between unsecured and secured loans so that you can utilize the best loan for your needs.

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Unsecured Loans

When you utilize an unsecured loan for your financing needs, lenders deem that you will able to repay your loan based on your current financial recourses. Loan approval is not contingent on ‘collateral’. This means that you are not granting the lenders the rights to any specific asset that you own, i.e. home or car, as security in the event that you are not able to repay your loan obligation.

Lenders usually judge the borrower based on the five C’s; character, capacity, capital, collateral, and conditions. Interest rates associated with unsecured loans are typically high than secured loans. In addition, unsecured loans also have lower borrowing amounts.

Secured Loans
Secured loans are typically utilized when financing larger purchases. A secured loan is reliant upon the borrower providing ‘collateral’ as security for repayment. For instance, home equity loans are a very common type of secured loan. In order to achieve approval for your home equity loan, you are going to be required to provide the lender rights to your home as collateral (your mortgage is written against the loan). Similar to an auto loan with the vehicle being the collateral. If you default on your home equity loan, the lender will take possession of your home. If you default on your auto loan, you will lose your car.
Secured loans typically have higher borrowing amounts in conjunction with longer terms for loan repayment than unsecured personal loans.
As the name of the loan suggests, secured loans offer ‘security’ that you are going to repay your loan based on the agreed upon conditions and terms. As indicated above, it is important to note that the property you put up as collateral will be repossessed in the event you are unable to make payments and default.
Credit reporting with Secured Loans and Unsecured Loans
Lenders can and do report payment history of both types of loans to the credit bureaus. Late payments and defaults with both types of loans can be listed on your credit report. With secured loans, the lender may use foreclosure or repossession to take the asset tied to the loan. These may result in additional negative entries being added to your credit report.