While shopping around for loans, you will inevitably come across the words “collateral” or “secured” in your travels. To the uninitiated, it can be a little confusing. What do these terms actually mean in the context of borrowing? And how do they affect the interest rate you pay to take out money? Let’s take a look.
What Are Secured Loans?
A secured (or collateral) loan is one where you pledge to give something of monetary value to the lender if you fail to meet your repayment obligations.
It sounds super complicated, but it’s actually much simpler than you might think.
Imagine you take out a loan for a car. Before the lender hands over the money, they get you to sign an agreement. The document states that the lender can sell your vehicle to recoup their losses if you fail to make repayments. In this case, the car is the collateral.
Collateral sounds like a bad thing. But it can actually work in your favor because it helps the lender to feel more secure. If you don’t keep up with repayments, they can always repossess your vehicle, keeping interest rates low.
What Are Unsecured Loans?
Non-collateral loans – also called unsecured loans – are different. Here you get money without having to pledge any possessions if you default. Examples include personal loans, working capital loans, and credit card loans.
Unsecured loans from providers like B3 Cash Solutions don’t attach many strings to their products. In many cases, you have complete freedom for how you use the money.
The downside is that most lenders will try to reduce their risk by looking at your credit score. If it’s good, then they’ll send you the money, no problem. If it’s not, they may offer less money or bump up the interest rate to cover their risks.
Major Differences Between Secured And Unsecured Loans
So, with those definitions out of the way, what are the main differences between collateral and non-collateral loans?
- Loan range: Collateral and non-collateral loans differ in size. With secured loans, you can usually take out a huge amount of money (possibly hundreds of thousands of dollars on a mortgage) because the lender can always sell the thing you’re borrowing against – the asset. Unsecured loans, however, tend to be much smaller. Usually, they are payments in the range of $100 to $1,000 to tide people over until their next paycheck.
- Credit score: People with poor credit scores can usually take out secured loans because of collateral. However, because taking out unsecured loans is riskier for lenders, borrowers need higher credit scores. With that said, some financial institutions specialize in high-risk loans for people with bad credit, so even people with credit scores below 700 can get unsecured loans.
- Length: Unsecured loans usually take longer to pay off than their secured counterparts. For instance, it might take twenty-five years to pay off a mortgage, but only a couple of months to pay back a personal loan.
Therefore, as you can see, there are some big differences between secured and unsecured loans. But despite these, low prevailing interest rates mean that there has never been a better time to borrow.
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