The Money Saving Fifty (50)

The two general categories of loan are secured and unsecured. What are the differences, and which one is right for you?

* Secured Loans

To qualify for a secured loan, you must own something that will serve as collateral – that is, assets the lender can claim in case you fail to make payments on your loan. Usually, lenders require that prospective borrowers own real estate and/or a home. That means that the lender has something to fall back on should you default on your loan. If you own a home or other significant collateral, or if your credit history is less than perfect, a secured loan is an option.

Characteristics:

1. Larger loan amounts
Secured lenders are more willing to give big loans. If you need a significant amount, a secured loan will probably be the way to go.

2. Longer payment period
Many secured lenders provide long payback times. This, of course, will make your payments smaller. If you prefer to pay low monthly amounts for a fairly long period, you may consider a secured loan.

3. Lower interest rates
Because the lender has recourse in case of default, they are able to offer lower interest rates. Once again, this will make your payments lower and possibly make your payback time shorter.

* Unsecured Loans

An unsecured loan is established on mutual trust between you and the lender, usually based on your credit history. The logic behind an unsecured loan is: if you’ve made timely payments on loans in the past, you are likely to do so now. Such a loan carries more risk to the lender, who has no recourse should you go into default. (Credit cards are an example of an unsecured loan.) If you are a renter or otherwise do not own real estate, and you have a good credit history, an unsecured loan is a viable option.

Characteristics:

1. Smaller loan amounts
If you need a fairly small amount of money, an unsecured loan makes sense. The borrower has little to lose and the lender has much to lose, meaning the lender views an unsecured loan as one carrying less incentive to pay. Obviously, a smaller loan amount minimizes the risk to the lender.

2. Few payback options
The longer a borrower takes to pay back a loan, the greater the likelihood that the loan will go into default – thus a greater risk to the lender. This is why unsecured loans usually offer shorter payback periods, which will make your payments higher. If you foresee being able to repay your loan quickly, considering an unsecured loan is a possibility.

3. Higher interest rates
Lenders usually have higher rates on unsecured loans to provide some fiscal protection.

Some loans can be either secured or unsecured – that is, if you are applying for an unsecured loan of $15,000 and your credit rating is not up to par, the lender may consider giving you the same loan as a secured one if you have the collateral.