Understanding Secured And Unsecured Personal Loans
May 26, 2011 by admin
A personal loan is the process by which an individual borrows money from a bank or other financial institution. A commercial loan is the same process except the borrower in this instance is a business entity. Unsecured and secured loans can be availed of by both individual and commercial borrowers.
What’s The Difference Between Secured and Unsecured Personal Loans?
A secured loan is one by which the financier (usually a bank) is pledged a particular asset from the borrower that they can reclaim legally should the borrower default on their payments. This asset is commonly referred to as the collateral. An unsecured loan on the other hand, is granted to borrowers based on their credit standing and current ability to pay. Because an unsecured loan gets least priority when it comes to claiming assets from individuals or businesses that have declared bankruptcy or defaulted on their payments, this is considered to be a higher risk than secured loans.
Types Of Secured Loans
A mortgage is one of the most common secured personal loans in the market today. This type of loan is used to purchase a house wherein the property serves as collateral for the loan. This means that if the borrower defaults on their payments, the bank can legally foreclose the house and resell it to recover the cost of the loan. Automobile personal loans are also one of the most popular types being offered. There are also two types of this loan; the direct and indirect auto loans. The direct method is when the bank grants the loan directly to the consumer. The indirect auto loan is when a car dealership acts as an intermediary between the bank and the borrower. Both new and used cars can be used as collateral for auto loans and as is the case with mortgages, defaulting on payments will result in the bank repossessing the vehicle to cover the outstanding balance.
Types of Unsecured Loans
For unsecured personal loans, there are a few options available. A credit card is a perfect example of an unsecured loan. There are two ways for you to utilize this, the first is by through normal credit card usage (in essence you are using it to pay for items that you cannot readily pay for), this is especially true if you do not pay your balances in full. Your monthly minimum payments will work similarly to the way a loan repayment is structured except that instead of having fixed payments that will regularly chip away at your outstanding balance, your debt will keep increasing. You can also avail of cash advances through your credit card with fixed payment terms. For those who need only to borrow a small amount, cash advances or payday loans are recommended since they do not tempt you to borrow more than you can afford to pay back.