Secured loans are typically used when borrowing significant capital to fund large purchases. A secured loan is conditional on the borrower pledging collateral to ensure repayment. If a default on the loan does occur, the lender has the right to take ownership of the pledged asset and use it in order to repay the loan.
An example and commonly used secured loan is a home equity loan. To receive a home equity loan one has to provide the lender rights in your residence as collateral. Similarly with an auto loan, an individual is using the automobile as collateral for the loan. In the event of a default, the lender has the right to take possession of the vehicle.
Secured loans tend to offer the most attractive terms, providing borrowers with low rates, greater borrowing amounts and longer terms to repay the loan. Secured loans for people with bad credit by definition implies that you are providing something as collateral, and that the loan will be paid off in accordance with the terms of the deal. Examples of secured loans include boat loans, home equity lines of credit, home equity loans, recreational vehicle loans and auto loans.
Effectively, the asset is considered to be “encumbered,” which simply implies that in most cases that asset cannot be transferred or sold by the borrower. This is only allowed to occur if the borrower has the lenders consent, unless of course the debt is completely paid off. If the asset is sold or transferred without the full amount of the debt being repaid, the lender takes ownership of the asset, subject to the lender’s lien.
There are options available as the lender is able to take legal action to try and take possession of an asset specified in the secured loan agreement, if of course the borrower defaults. Taking ownership of the assets give the lender the ability to sell the asset and erase the outstanding debt. If in fact the sales proceeds are more than the loan amount outstanding, the lender is obliged legally to give the extra capital to the borrower.
Unsecured loans are different from secured as there is not an asset pledged as collateral. When an individual applies for an unsecured loan, the lender has to come to the conclusion that the borrower is able to repay the loan based on their financial resources.
Providing an unsecured loan is not based upon anything material, meaning that the individual does not have to offer the lender ownership of an agreed upon, such as ones car or home, in case the borrower is unable to repay the debt. These type of loans tend be more cumbersome to receive and are normally provided at rates higher than loans that are secured. They also tend to have borrowing limits that are lower.
Unsecured loans generally rely primarily on an individual’s credit history and their source and level of income in order to qualify for the loan. If there is a default on an unsecured loan, the lender has a more difficult and tedious time collecting that with a secured loan. Options include multiple lawsuits and the use of debt collectors to recover some or the entire loan amount. Some examples of unsecured loans include student loans, personal loans and personal lines of credit.
In the event that a borrower defaults, the lender unfortunately is unable to claim any of the borrower assets even though some may exist. The borrower can try and attempt to collect the loan amount using prescribed methods and inform any amount that has defaulted to multiple credit reporting agencies. This in turn can negatively affect the credit score of the borrower. The decision on whether to take out a secured or unsecured loan depends on what or if the borrower is willing to pledge.