Sunday, June 15, 2014

What Makes an Unsecured Loan Different?

Before you take out a loan, there are a few notices that you need to remind yourself about. This is with regards to unsecured loans, what sets them apart from secured loans and what their advantages and disadvantages are.

The main difference between a secured and an unsecured loan is the presence of collateral in the former type. The assets that back up secured loans can be in the form of a house for a mortgage or a car for a title loan. Whenever the borrower is unable to repay his dues on the loan, the collateral will be taken by the lending company or the bank which lent the loan. The collateral provides more confidence to the lenders to allow you to borrow the money.

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Meanwhile, unsecured loans require no need for collateral. The most famous examples of unsecured loans are credit card debts, student loans, and medical loans.

Most lending companies would only approve the application of an unsecured loan to those who have good credit records. These companies may risk dealing without any form of asset as their security but the borrower's credit standing may satisfy their need for guarantees of ability to pay.

Since in an unsecured loan there is no asset that the lender can take hold of, the only way to make sure that the loan is paid is by reporting delinquencies to credit bureaus. This forces the borrower to make regular payments or to pay the delayed fees as when credit bureaus know about these issues, the borrower's credit score will be negatively affected.

When you have an unsecured loan, you may have no fear of having your house, your car, or whatever collateral you should have used for a secured loan be repossessed by lending companies.

An unsecured loan can be risky because of the possibility of it affecting your credit rating. If you are paying regularly, there is no need to worry. If you are having some problems paying your dues, you can have poorer credit rating after some time. This means that you will have fewer opportunities for making different financial transactions with other parties.

Another disadvantage that the borrower can get into, especially later when there is a discrepancy in his or her ability to pay, is in dealing with debt collectors. You will be persuaded to pay your bills as much as possible. But since the beginning it is your responsibility to pay back what you owe the company, debt collectors are one thing that you can expect.

If debt collectors will not be able to make you pay your debts, the lending company might sue you, get the amount that you owe then from your salary or the properties that you own.

Aside from the risks, opting for an unsecured loan can have lower approved limits when comparing it with a secured loan. Most loans are approved with amounts that are significantly lower than what the borrower can get if with a collateral as in the case of a secured loan.

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