When you need to borrow funds, there are several options you can consider, which also includes the bank loan. But while anybody can borrow these funds, to be a smart borrower, you need to understand the different types of loans. While you may be aware of the different types of bank loans, but are you aware of the different categories of the loan?
Bank loans are classified into the secured loan category or the unsecured loan category. Each of these loan categories possesses different features, which will affect your functionality to use the loan, to repay the loan, and even the assets you currently own in order to get the best of the loan rates. Given below is the difference between the two loan categories:
Secured loan: Under this category, the bank loans are protected either by an asset or collateral. This is normally the asset purchased, with the funds forwarded by the lender. For example, items like the home, car or even one’s business can be used as collateral wherein which a lien is placed on these items. Other assets such as stocks, bonds or even personal property can be provided to secure a loan as well. In this loan, the lender will hold the title or the deeds of the asset, until the complete loan amount has been paid in full. This would also include the interest rate as well as other applicable fees.
Benefits of this category:
• The loans in this category will allow you to obtain a large amount of funding. This is because an assurance is provided, in exchange for the collateral provided. By putting your property on the line, it is a safe guarantee that you will do everything in your power to repay the borrowed funds.
• The loans are not only for new purchases either. The secured loan can also be used as home equity loans, or even a home equity lines of credit. Normally, these loans are based on the amount of your home equity. This is basically the current market value of your property, minus the amount that you still owe. In this case, your property is used as collateral, where failure to make payments, will result in the loss of your home.
• With this loan category, you will have access to lower rates, higher borrowing limits and longer repayment terms. This is due to the fact that you will provide an asset in exchange for the loan, as a form of security. In the occasion that you are unable to repay the loan, the asset placed as security will be sold to raise funds to repay back the borrowed funds.
• The loans in this category include mortgage, home loan, an auto loan for both used and new cars, business loan and gold loan.
Unsecured loan: The other types of loans comes under the unsecured loan. These includes credit card purchases, education loans or even personal loans. In this case, the risk of lending funds is high, as there is no asset to be provided in exchange for the funds borrowed.
Benefits of the unsecured loan include:
• If you don’t have any assets of high value, you can opt for an unsecured loan to borrow funds.
• You have greater flexibility when it comes to applying for a loan amount as compared to the secured loans.
• Examples of unsecured loans include personal loan, credit cards, and education loans.