What is the difference between a secured loan and an unsecured loan?
Secured loans are used to borrow large sums of money against something you own and are usually used for major expenses, such as large-scale house improvements or debt consolidation.
Just like the name suggests, ‘secured’ means that a lender asks to secure the loan against a major asset. They do this as a form of security in case you can’t pay them back.
This is usually your property – your home – so it means that you agree that if you can’t make the loan repayments, you may have to sell your home to repay the debt owed. Likewise, if you used your car as an asset, it may be repossessed if you don’t keep up repayments.
Lenders may see secured loans as lower risk because they know they can collect the money you owe from your assets (your home or even your car) if you don’t make the repayments. Because of this security, secured loans may come with better interest rates and longer repayment terms, which means lower monthly repayments compared to unsecured loans, which are not secured against any kind of property.
Unsecured loans, on the other hand, are usually used to pay for smaller expenses, such as car repairs. If you don’t make repayments, it will show on your credit score. The downside of this is that a bad credit score may lead to difficulties if you want to borrow in the future.
Unsecured loans also come with a much shorter repayment term, typically up to 7 years, compared to longer repayment periods on secured loans.
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