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Secured and Unsecured Loans - Which is Better?

 


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Secured loans and unsecured loans have positive and negative aspects both for lender and borrower. What are some of these aspects? What is the difference between a secured loan and an unsecured loan?

The most common type of secured loan is a mortgage. The Borrower makes a commitment to repay the loan in accordance with its terms. The mortgage is secured by the Borrower's home which means if he fails to pay the lender can confiscate the home as payment. All secure loans and guaranteed by some type of real or personal property which can be taken in the event of a default of payment.

This is serious because it means if you default on even one payment the lender can take your home in foreclosure and sell it for payment of the debt. In reality, the lender would not take such aggressive action after only one missed payment. The foreclosure and sale of a home is a long and costly process that lenders try to avoid if at all possible.

The truth is that lenders will wait a long time before resorting to foreclosure. Even after several months of default payments the lender will continue to try aggressive demand letters to motivate the Borrower to pay. Even when the real estate market is good for selling homes, lenders would focus their time and resources in other things besides foreclosures and sales.

While this may be the case it would not be smart to ignore the fact that the lenders have this right. The reality of the lender's rights in connection with a secured loan can even be seen with unsecured loans. Even when a borrower has not pledged property as security for a loan, if a borrower defaults on a loan the lender, through simple legal proceedings, can confiscate property, or seize other assets.

However, taking legal action is still an expense for the lender and requires some time and effort that they would rather not sacrifice. In most cases, they prefer to work out a payment arrangement.

Typically the interest rate on an unsecured loan is higher than secured loans. This is because the lender is taking a greater risk since the money is not secured by assets or property.

Since the lender will incur more loss on unsecured loans defaulted on, they make up for this potential loss by charging a higher rate of interest. Sometimes that higher interest rate will encourage borrowers to select a secured loan. Lenders prefer that because the borrower has more incentive to repay the loan when it is attached to their property.

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