Secured and Unsecured Loans – How to distinguish between them

A personal loan is always there to improve your financial situation whenever you find yourself amidst financial challenges. Even under circumstances when you need some money for purchasing something, such loans could be of great help. Your loan amount may vary depending on the terms of repayment, rates of interest and principal amounts. Secured and unsecured loans are the two types of personal loans that you come across in the market. You must understand the differences between these two categories in order to avoid trouble in the future.


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What is a secured loan?

A loan that needs collateral is termed as a secured loan. You must put up something worthy of meeting the lender’s losses in the event of your failure to repay the loan amount. It will enable the lender to recoup much of the loan amount by selling the object that you put up as collateral. Besides using jewelry, you may use your land, vehicles and properties for putting your collateral. This type of loan is described as “secured” due to its nature. Loans of this type turn the lenders more flexible and let them provide bigger amounts as principal, longer periods of repayment and better charges and rates for the borrower.

What is an unsecured loan?

A loan that doesn’t need collateral is termed as an unsecured loan. This option proves a lot safer from the perspective of a borrower. It protects the borrower from losing something important or valuable like that of his home. It tends to be riskier from the perspective of a lender. That’s one reason why the lenders run credit checks and issue loans worth smaller amounts. An unsecured loan helps you to reimburse amounts that you spend towards small purchases, home repairs, using cars or going out on vacations. Till you posses a good credit score and earn handsomely, you can’t expect a loan more than $10,000.

Qualifying for an unsecured loan

When it comes to an unsecured loan, you’ll need to qualify as per a few basic criteria. In the event you don’t meet these norms, you won’t qualify for the loan regardless of how many credit cards and loans you possess.

Loans can’t be issued to minors; you must be at least 18 years of age at the time of application. In order to prove your capacity to reimburse under usual circumstances, you must show a regular monthly income worth $750.

In case you’re applying for loan with a big lender or bank, they will run a credit check to determine your financial stability. Your loan application may be rejected, if your credit history shows any black mark or in case you’re a payment defaulter.

With loans, you’ll need to repay the principal and an additional amount as interest. The interest that you pay is calculated as per the APR (Annual Percentage Rate). This is a portion of the principal that’s calculated every year.

The lender’s wish to create a repayment plan for you seems natural when you can’t make your loan repayments. In case this repayment process fails then they may take any civil action against you or start collecting the proceedings. It could be taken in the event any collateral is placed by you, otherwise you might need to pay the interest back over a longer period of time.

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