2/21/2023
Nowadays, getting financing under different conditions is much easier than it used to be, especially in the United States.
Banks, traditional lenders and online lenders are on hand to give you a little extra cash even if your credit score is bad or you haven't even started your credit history yet.
Among personal loans we can find two main types, which differ in the collateral they ask for to be lent, these are secured and unsecured loans, and in this article we are going to tell you about them.
What are secured loans
The dynamics of a secured loan are relatively simple to understand. In fact, it works in the same way as an unsecured loan: you request a certain amount from a bank or private lender and then pay back the money little by little over an agreed period of time.
The loan will be under a contract that designates the interest of the monthly payments, the possible opening and prepayment fees, the time to return the money and other possible obligations and rights.
What distinguishes a secured loan is the fact that you have to leave a guarantee, collateral or guarantee to be granted the capital you need.
The most common forms of these instruments are mortgage loans, secured credit cards or car title loans.
What is the collateral in secured loans?
Within this type of product there are several ways to guarantee the credit:
Real estate property
In the case of mortgages, the guarantee is given by the value of the home or business premises used as collateral, which will become the property of the bank in the event of continued non-payment.
Property used as collateral
In car title loans the collateral is a vehicle, but in other loans other properties can be used. This is also the case with pawnshops, which offer you money for a product that you leave as collateral.
Money deposit
This option is the most used by banks to offer secured personal loans and secured credit cards. It involves depositing an amount of money with the bank, which you will not be able to withdraw until you return the borrowed money.
It can be used either by customers who do not want to use their savings or move their investments, or also by people with a bad FICO credit score who want to improve it or people with no credit score who want to start their credit history.
If you can't pay, you lose the guarantee
At the moment you accept this financing, you know that if you stop paying, you will have to assign the asset or deposit to the financial institution that lent you the money.
In the U.S., it is common that the repossession of the property or asset may not be enough to pay the money you owe. This happens because the lenders sell the collateral in question and such a transaction may not fully cover the loan that was given.
In this particular case, you are taking on the responsibility of paying off the difference to pay off the debt in full.
What are unsecured loans?
Unlike secured loans, unsecured loans do not have a guarantee or collateral, beyond the applicant's own personal solvency, who will eventually respond with his or her personal assets in case of non-payment.
This means that banks or institutions assume a greater risk when granting this type of credit because they have no way of recovering the money through seizure or repossession.
In view of this provision, it is not difficult to understand that banks put a greater number of obstacles to obtain these loans, i.e., the requirements are higher.
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Among the most common unsecured loans, we find credit cards, student loans, personal loans, lines of credit and other products that do not ask for collateral to process the application.
The requirements for unsecured loans are more stringent.
One of the main details about these unsecured debts is that you will be required to have a good credit score to get financing. Generally, you will need a very good to excellent credit history for the bank or lender to give you a prime rate or something close to it.
In addition, you will need to demonstrate that you have the means to repay the money or that you have collateral.
Differences between unsecured and secured loans
The explanatory part about what the differences are between these products is fairly simple to understand. We can summarize them in 3 main categories:
- Requirements. Since banks are always looking to take on as little risk as possible, they make it easier for a secured loan than an unsecured loan. It is in their interest to cover their backs in order to lose as little as possible.
- Interest rate. This depends more on your credit history and the type of loan. While with a mortgage the rate is usually very low, with an unsecured personal loan that requires a good credit score the interest rate may be lower than with a secured loan.
- Guarantee or collateral. The main element that distinguishes these financial instruments. While a secured loan requires an asset or cash deposit as collateral, this is not necessary for an unsecured loan.
Español: Diferencias entre préstamos asegurados y no asegurados