In today’s confusing world of finance and banking institutions, it can be easy to get lost in all the terminology. When it comes to loans, financial rules separate these into two categories: secured and unsecured. The crucial difference between these two categories of loans is that one type of loan is backed by a material or financially valuable asset and the other type is not.
When a financial institution or bank agrees to loan an individual some money, they often require a guarantee in case of repayment. A house or any other valuable material can be held as collateral in case of non-payment, known more succinctly as a secured loan. If individuals fail to make their loan repayments in a timely fashion, the bank or financial institution lender can seize the item or property.
Many people fail to understand the critical fact that they can continue to still be liable for debt repayments even if their lender does seize their property. Generally speaking, banks and financial institution will take repossessed or seized property and sell it, using the proceeds towards the loan. But if the repossessed property fails to sell for enough money to cover the loan and mandatory fees, the individual continues to be liable to pay for the difference.
Many secured loans, particularly mortgages, can make an individual eligible for substantial tax deductions.
An unsecured loan is usually more difficult to secure from a financial institution or bank because the lender has no recourse in case of non-payment. An unsecured loan can only be obtained after the lending institution or bank performs a thorough analysis of the borrower’s creditworthiness. Usually, only potential borrowers with very high credit ratings will be approved for an unsecured loan. These types of unsecured loans are often called signature loans or personal loans because they are based on the merit of the individual in question.
In some cases, these unsecured loans are known as “character loans” because they are being approved on the basis of individual knowledge of the borrower. Celebrities, prominent members of society and others can benefit from personalized treatment from banks and lending institutions in the form of unsecured character loans.
Because an unsecured loan poses a larger risk for the lender, unsecured loans generally carry higher interest rates than secured loans. Even so, sometimes unsecured loans from certain banks or lending institutions can carry a lower interest rates than credit cards. Many savvy borrowers establish unsecured loans as a type of revolving line of credit, giving them flexible financial options for short-term needs. Borrowers must be very careful with short-term unsecured loans, as they often come with a variable interest rate that can leave imprudent people caught short if not carefully monitored.
Unsecured loans unfortunately do not directly qualify individuals for tax deductions.