Q:

What is the difference between a secured loan and an unsecured loan?

A:

Quick Answer

Tesco Bank states that the primary difference between a secured loan and an unsecured loan is that a secured loan is backed by collateral while an unsecured loan is not. Secured loans provide a greater level of protection to the lender, since the collateral becomes the property of the lender if the borrower defaults.

Continue Reading
What is the difference between a secured loan and an unsecured loan?
Credit: Blend Images/Ariel Skelley Vetta Getty Images

Full Answer

According to Tesco Bank, the additional protection offered by a secured loan is frequently reflected by higher borrowing limits and lower interest rates. Although unsecured loans are not backed by collateral, lenders do not blindly loan money. A person's credit score, employment history and income play a role in determining at what rate and how much money that person is permitted to borrow.

WiseBread lists auto loans, mortgages and home equity lines of credit as secured loans. If the borrower defaults on these types of loans, the lender can legally seize the property used as collateral. Examples include repossessing a car or foreclosing on a house. The most common types of unsecured loans are personal lines of credit, student loans and credit cards. Since there is no collateral with unsecured loans, lenders must use a different set of techniques to collect on defaulted debts.

Financial Web reports that negative marks on a person's credit report are the first consequence of default. A creditor may pursue collection through mail or phone calls or via a court judgement that allows it to freeze bank accounts or garnish wages.

Learn more about Credit & Lending

Related Questions

  • Q:

    How do you get approved with a hard money lender?

    A:

    Approval for a hard-money loan requires collateral. Most hard-money lenders loan a maximum of between 50 and 70 percent of the collateral's value. Hard-money lenders intentionally keep the loan-to-value ratio low so that it is easier to recoup losses from a borrower's default through the collateral's repossession and sale. Without collateral that has a sufficiently low loan-to-value ratio, a hard-money loan is impossible to obtain.

    Full Answer >
    Filed Under:
  • Q:

    What is "hard money"?

    A:

    Hard money, in terms of loans, is a loan that uses collateral or an asset in order to secure the amount borrowed. This option is used when an individual cannot qualify for a traditional loan due to poor credit or low income.

    Full Answer >
    Filed Under:
  • Q:

    What is unsecured debt?

    A:

    Unsecured debt is a loan with no collateral, which means the interest rate is usually higher than that of secured debt, which is backed by an asset. Some examples of unsecured debt include credit card debt, student loans and medical bills.

    Full Answer >
    Filed Under:
  • Q:

    What is a home equity line of credit?

    A:

    A home equity line of credit, or HELOC, is a loan taken out that uses a person's home equity as collateral. Contrary to a traditional loan where funds are disbursed all at once, a HELOC has a draw period during which funds can be accessed as needed, up to a set limit. In addition to only having to pay for the funds that have been used, HELOCs often allow borrowers to pay interest only initially, according to MyFICO.

    Full Answer >
    Filed Under:

Explore