The difference between a secured loan and a unsecured loan, a question we get often asked ?
In simple words a secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral or security for the loan. This is a form of insurance for the loan provider. When you are unable to pay for your loan and default they will be able to recover the outstanding loan amount by disposing of the assets.
A good example of a secured loan is a home loan or mortgage. The property is bonded and can be sold by the bank to recover outstanding loan amounts in case of default. Due to property being a fixed asset with a long life expectancy and possibility of appreciation banks and mortgage institutions are able to provide long term loans (20 to 30 years) at lower interest rates.
Another example of a secured loan is a loan taken out to purchase a new or used car. Much like a property is security for a mortgage a car is the security for the car loan. The difference being the duration of the loan. The loan period is considerably shorter — often corresponding to the useful life of the car and the rapidly depreciating value of the car.
Unsecured loans are loans without any kind of security in the forms of assets, properties or cars. These loans come in many different forms.
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Unsecured loans are often used to manage a short term cash flow need. It can be used to obtain assets but it can be used for day to day expenses as well.
Unsecured loans are generally of a short duration and are considerably more expensive then secured loans due to the higher risk to the lender.