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How It All Works: Are Secured Loans Better Than Unsecured Loans?

Money, money, money! Everybody wants some more, but unfortunately, it isn’t always there when you need it. Whenever you have some kind of emergency, you may have to consider getting a loan. According to statistics, more people are seeking personal loans than ever before.

But before you go out and sign up for one, it’s important to understand the differences between the two types of loans – secured and unsecured loans.

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Unsecured Loans

This is a type of loan where that does not require any kind of collateral. All the lender will ask for is a bank statement and an agreement to repay the debt. If you fail to pay, the lender cannot take the assets you bought with the money. The lender also has no right to dictate how you use your assets. Thanks to the simple documentation required, these types of loans are widely available to everyone. The whole process is very short because you can get fast approval. This is much more convenient than seeking a loan from a bank and the terms of repayment are often quite flexible.

However, there are some disadvantages. Since there is no security for the loan, the lender carries a higher risk in case of default in payment. Unfortunately, this means that you will have to pay a higher rate of interest. Examples of unsecured loan include retail credit cards, personal loans, and student loans.

Secured Loans

This is the type of loan where you are required to provide some kind of collateral. The lender will ask you to pledge some kind of asset that you own as a way of guaranteeing repayment of the money. This collateral is usually something that has value, for example, cars, real estate, stocks, personal belongings, money, or even livestock. If you fail to pay back the loan as stipulated, the lender simply sells the collateral to pay off the debt. Examples of secured loans include car loans, home equity loans, and mortgages.

A secured loan has certain advantages. Firstly, it has lower interest rates. This is because the lender isn’t taking much of a risk due to the availability of collateral. Secondly, these loans have a more relaxed credit requirement. Finally, a secured loan enables you to borrow a larger amount of money. The disadvantages of secured loans include potential repossession of your assets in case of default. The lender can also restrict your usage of the collateral, thus preventing you from altering, depleting, or relocating the asset.

As you can see, an unsecured loan is a much more convenient way to get access to cash whenever you need it. However, there are a few things you must keep in mind. An unsecured loan should be taken out only for emergencies. Another factor to consider is the high rate of interest. Always make sure that you can actually pay back the loan on time. At the end of the day, knowledge is power. You need to understand what you are getting into before signing on the dotted line. Examine the pros and cons and decide the best kind of loan that will suit your needs.

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