Loans (credit) can be ¡®secured¡¯ or ¡®unsecured'.
A loan backed by assets (e.g. a car or property) belonging to the borrower in order to decrease the risk assumed by the lender. The secured asset is the ¡®collateral¡¯ or ¡®security¡¯ for the loan.
Providing security is one of the best ways to reduce the cost of loan as the interest rate is lower than for unsecured loan. But if you fail to keep up the repayments on a secured loan, the lender has the right to take possession of the secured asset to recover the amount you owe. Before a lender can do this, they need to issue a ¡®default notice¡¯ setting out why they are taking action. You then have 30 days to make the outstanding repayments, or to renegotiate the debt with your lender before they take further action.
Following are the examples of the secured loans:
Car Loan is taken to buy a new/used car.
Home Loan is taken to buy or construct or rennovate a home.
Loan Against Property is a form of secured loan where your pledge your asset and use the amount needed for consolidating your debt or foe any other end use.
Secured Business Loan can also be secured if any asset (machinery, stock, raw material, building etc) are pledged against the loan amount required.
With this type of loan, you do not need to put your collateral against the loan. The loan is given on the basis of your income and expense behavior. The lender takes on more risk with this type of loan, which is generally reflected by higher interest rates.
Following are the examples of the unsecured loans:
Personal Loans is the most common form of unsecured loans, which is referred to as all-purpose loans; they are ideal to buy a product for which you do not have ready liquidity.
Unsecured Business Loan, as the name explains is a type of loan that doesn't require a collateral. It is typically at a higher rate of interest and is taken for a comparatively smaller tenor.
Credit Card loans Credit card is the most flexible form of short-term borrowings with easy repayment options.
Bank Overdraft is also a form by which you can avail unsecured finance from your bank.
Secured loans offer lower interest rates and better loan repayment terms, such as extended repayment options or variable interest rates. Secured loan borrowers can also often choose between a fixed and variable rate (Home Loan), as well as decide to pay nothing for the initial term of their loan. This ultimately means that secured loan applicants have greater financial flexibility and more savings options than unsecured borrowers.
Unsecured personal loans are better for those people who are in a need of instant financial assistance as these loans have a minimal paper work. The approval process is also very quick and there is no appraisal of the collateral item.