Understanding the Difference Between Secured and Unsecured Loans

You will be faced with many instances in your daily life when you'll require an infusion of cash to meet financial emergencies. In that case, you'll have to decide the type of loan you'll borrow. There are two types of loans you can take: secured and unsecured. But before you choose, you need to understand the difference between taking out a secured and unsecured loan online. It's straightforward – a secured loan typically requires collateral (some property or a vehicle) with a significant financial value that acts as security for your lender. So, if you default on your loan, they can recover their loss using the collateral provided. An unsecured loan, on the other hand, doesn't require any collateral. They are a riskier proposition for your lender than you. So, how do you figure out what to choose? It depends on what your available options are at that point and which is the most affordable one.

Secured Loans: How do These Loans Work?

You've heard of an auto loan (also known as a vehicle loan) and a home loan. Chances are either you or your parents have taken such a loan already. These are the two common examples of secured loans. If you take out a vehicle loan, your lender gives you money to purchase the vehicle you need. In exchange, he also uses your new car (which you haven't yet purchased) as collateral for his security. In case you default on your vehicle loan and don't repay it on time, your lender will take possession of your car, sell it, and use the proceeds to cover his loss. The same thing happens in the case of a home loan as well. Your lender will take ownership of your house and use its sale proceeds to pay off the debt.

Consequences of Defaulting on a Secured Loan

The consequences of defaulting on a secured loan are pretty severe. Not only will you lose the collateral you've pledged against the loan, but it will harm your credit score and credit report as well. You will be a defaulter in the eyes of all the credit rating agencies. So, if you don't want to lose your home or car, you need to take all the steps required to ensure your unsecured loan's timely payment. You also need to know how long it will be (from your EMI due date) until your lender will repossess what you've put up as collateral.

Unsecured Loans: How do These Loans Work?

Unsecured loans are those loans that don't require any collateral. The most popular examples of small unsecured loans are credit cards, personal loans, and student loans. Because there's no collateral involved, these loans are a riskier proposition for your lender, which is why they come with relatively higher rates of interest. To qualify for an unsecured loan online, you also have to show a solid credit score, strong repayment history, and stable income.

Consequences of Defaulting on an Unsecured Loan

While you won't lose any property or your vehicle if you default on an unsecured loan online, the consequences will still be severe. Your credit score will take a big hit, and credit rating agencies will also record this default on your credit report. It will stay on for an extended period. You will also have to spend a lot of money on late payment penalties, depending on your lender. So, both your credit and finances are affected. You will effectively lower all chances of qualifying for future loans as well because no lender will confidently sanction you a loan.

In Conclusion

Whether you choose to take a small unsecured loan or an unsecured one, make sure it’s the most affordable option for you. Most of all, honour all your loan EMIs on time to avoid harming your credit score.

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