Secured Credit vs. Unsecured Credit
Most people will have to borrow money at some time in their lives. There are basically two types of loans that people can apply for if they are in need of cash. The first type is a secured loan. This type of loan requires that borrowers provide assets as collateral, so not everyone can qualify for this type of loan.
Naturally, the fact that lenders are given “payment insurance” serves to the credit seeker’s advantage. Providing collateral usually entitles the borrower to more favorable interest rates. However, people applying for this type of loan have to be mindful that missing payments on the loan will give creditors the right to repossess the assets the borrower put up as collateral. An example of a secured loan is a loan to purchase a house. The house serves as collateral and can be foreclosed by the lender if the repayment schedule is not kept. Any money remitted for a down payment or money already paid toward the amortization schedule would be lost.
The second type of loan is an unsecured loan. These loans are referred to as unsecured because the borrower doesn’t have to put up any assets as collateral. Credit card debt is one example of an unsecured debt. Generally speaking, because there is no collateral for the lender to seize if a borrower becomes delinquent in repaying the debt, the interest rates are could be higher than with a secured loan. However, whether a loan is secured or unsecured, the borrower’s credit rating will definitely factor into the interest rate that is charged. Naturally, unsecured loans are open to a wider market as it’s not necessary to have assets to be eligible for such a loan. In addition, unsecured loans are typically processed faster than secured loans.
No matter the type of loan, it’s important that all debts are handled responsibly. This means not taking on more debt than your level of income can reasonably handle and making sure that all loan payments are made on time. People who adhere to these rules are on their way to a good credit rating and solid financial footing.