If you’ve started shopping around for a personal loan or a car loan, you’ve probably come across the terms secured and unsecured loans. Security, in the realm of loans, refers to granting rights over an asset that has some financial value. Access to that asset therefore offers a lender the security that money can be repaid through the sale of the asset.
What is a secured loan?
Secured loans are often granted for purchases of assets with value like cars, equipment or houses. The asset being purchased often becomes security for the loan. If for any circumstance, the borrower fails to repay the loan, the lender is able to sell the secured asset in order to recover and apply proceeds against the full amount borrowed. If the sale of the asset does not cover the amount owing, then the borrower will still owe the short fall.
What is different about an unsecured loan?
Unsecured loans are riskier for lenders because no security item is provided by the borrower. Because of this risk, unsecured loans generally come with a higher interest rate than secured loans.
Who are unsecured loans for?
Unsecured loans are often granted for small amounts and to individuals for discretionary purchases such as home improvements. Some banks will offer unsecured loans for cars at either fixed or variable rates. Family members can act as guarantors for unsecured loans, which means they are willing to pay if the borrower is unable to make the repayments.
Secured car loans
The most common type of car loan is a secured one. The interest rates on secured car loans is usually fixed, which means that your repayment amounts will stay the same, and you will likely pay a lower interest rate than with an unsecured car loan.