What is the difference between a Secured Loan and Unsecured Loan given by Banks?

People take bank loans for many purposes, like purchasing houses, purchasing vehicles, educational purposes, or to meet the unforeseen personal expenses. Banks provide short term and long term loans at fixed or variable interests, to be repaid in a fixed period of time.

Banks provide both secured and unsecured loans. Let us see what are they.

Secured loan

  • Secured loans are those types of loans that can be protected by using an asset or a collateral of some kind. The type of item that is being purchased by the person, then collateral such as his car or house can he used to keep as a security in case he cannot return the amount back to the bank.

  • The bank or the financial institution that is holding responsibility for the collateral have full rights to keep it until the person who has to take the loan has fully paid off the loan as well the interest amount.

  • Various other items can be used as collateral from the people such as bonds, personal property, and stocks. This type of loans is basically the safest and the best way for banks to give plenty of loans to the customer when they have a safe and secure deposit with them that belongs to the person taking the loan.

  • This method is very secure as the lender will not normally give large amounts of money with the assurance that the money will be repaid.

  • This type of loan is not only used in order to make new purchases but also used to pay home equity loans of credit. Secured loans are basically the current market value of your house minus the amount still owed to the bank.

  • These loans are mostly preferred by people because they usually offer a lower rate of interest and the borrowing limit of this is high and the time that you get for the repayment is also much more than that of normal loans.

Some examples of secured loans are mortgage, home equity line of credit, auto loan, boat loan, and recreational vehicle loan.

Unsecured loan

  • These type of loans are the exact opposite of the meaning of a secured loan. Unsecured loans are things such as credit card, educational loans, personal or signature loans and other purchases.

  • The lenders who are lending this money, whether it is a bank or a private money lender, they take more chances of risk by giving such an opportunity for a loan where they have no property or assets of the customer in order to recover the money in case things don’t go as planned.

  • Money lenders, as they are not taking any security in the form of mortgage, charge a hefty amount of interest on unsecured loans.

  • When you apply for an unsecured loan then you will have to repay the loan based on your financial resources such as monthly income.

Some of the examples for unsecured loans are personal loans, personal lines of credit, credit card purchases, student loans and also some basic home improvement loans.