Loans offered by financial institutions can be grouped as secured or unsecured. The primary difference between the two categories is that secured loans are backed by properties as collateral while unsecured ones aren’t. The borrower’s car, house, jewelry or any possession with high value could become collateral to the debt. Thus, the debt is secured against these assets. The lender can claim the collateral in the event of the borrower’s failure in complying with the legal obligations attributed to the debt. On the other hand, unsecured loans have significantly higher interest rates with the absence of material guarantee.
Home and car loans are some of the most common examples of secured loans according to a Norwegian site. Before the lending institution grants a credit, the debtor must be able to provide a legitimate property as collateral. With the borrower´s valued properties at stake, the creditors are somehow assured that the loans will be paid and thus offer low interest rates and flexible payment details. The debtor can even negotiate the interest charges and repayment schedules.
The amount which can be granted to the debtor also depends on the value of the property presented. Furthermore, good credit rating would also give more bargaining advantages to the debtor.
This type of loan is also known as personal or signature loans. People often turn to these loans for minor purchases such as gadgets and for planned or unanticipated costs such as vacations and medical expenses. Although having collateral is not a requirement in this type of debt, the financial capabilities and status of the debtor around the time of the request is still assessed before a loan is granted. Generally, those with good credit history and monetary status have higher chances of being approved.
Pros and Cons for the Borrower and Lender
In secured loans, the creditor has a guarantee for a debt in the form of assets. With this, the debtor is compelled to follow the negotiated terms otherwise the creditor has the right to acquire the properties as repayment. While this would offer the debtor more freedom in negotiating with the terms, this also poses a great risk of losing the property. However, the lending company also understands the long and tedious process of claiming a property. In this line of business, the lender has a lot of other tasks to attend to that this process of taking a property seems unprofitable. The likely scenario would be that the lender diligently sends a number of letters asking for the payment owed even if the debtor has delayed payments for a few months.
Unsecured loans entail higher interest rates for the amount owed to the creditor. By providing this type of credit, the lender appears to take higher risks, hence the high rates and tedious application process. Furthermore, the amount granted for this type of debt is generally lower in comparison to secured loans. While the lack of collateral may seem advantageous for the debtors, this limits their capacity to negotiate the amount they can borrow and it will rates incur.