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Debt Handling - Secured vs Unsecured Loans
Both lender and borrower are faced at the outset with a basic decision - to obtain
a loan that is either secured or unsecured. But, what does that mean, and what are the pros and
cons of each for either party?
A secured loan is one in which the money borrowed is guaranteed to be repaid or
some asset will be forfeited. The most common example is a home loan. The borrower agrees to repay
on the terms of the contract, and if he or she defaults, the lender can legally claim the home as
compensation.
In theory, that means that if you miss a payment on the home loan, the lender has
the legal right to foreclose and sell the property. In practice, that never happens. Among other
reasons, lenders know that reclaiming a house is a long, unpleasant chore and they would be left
with the necessity to sell the home to recoup the money.
No lender is going to do that for such a small misstep as missing a single payment.
Even if the borrower lags by several months, at most the lender will typically send a series of
firm letters demanding payment before taking any other action. Even in an active seller's market
lenders have many more important things to do and don't want to undertake the effort of removing a
homeowner and selling a house.
Nevertheless, it's wise to realize that the lender has this right. How important or
not that right is can be judged by recognizing that even with an unsecured loan, creditors have the
legal right to seize assets like salary, stocks and property. This requires only undertaking a
relatively simple and inexpensive legal procedure to declare the borrower in default.
But, legal procedures are only RELATIVELY simple and inexpensive - and lenders will
almost always try to work out a repayment option before taking that step.
There are other differences between secured and unsecured loans that borrowers
should be aware of. Since the money in an unsecured loan is not, in theory, backed by the right to
seize the asset in case of default, the interest rates on them are usually higher.
The lender in that case is taking a larger risk, and they are compensated by
charging higher interest. That covers losses from defaults (which are higher on unsecured loans)
and is one way to change borrowers incentives. Most people will try much harder to meet a debt that
is tied to their home than for an unsecured loan.
So, there are pros and cons for both borrower and lender to obtaining one type of
loan versus the other. As a borrower, if you want a gauranteed personal
loans you may find it necessary to incur a higher rate of interest if you don't have a home,
bonds or other assets to offer as collateral. Or, you may simply want not to put those at risk.
Only you can decide in your particular circumstances whether the advantages
outweigh the risks and costs.
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If you have bad credit history and wish to apply for a unsecured loan, we have
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The unsecured bad credit loan may not
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