Deciding on the type of loan to take normally depends on the circumstances. For instance, when buying a house, one may be spurred to take a secured loan, and an unsecured loan when buying furniture.

“The difference between these two loans is just one word – collateral,” says award-winning wealth coach Richard Harrington.

We invited him to explain that difference to help you decide which one suits your needs best.

What is a secured loan?

Secured loans are enforced by collateral, such as a house, car or any other form of valuable property. So, the risk is leveraged on to the borrower because the lender has a guarantee that the loan will be repaid by the collateral.  The loan amount granted as a secured loan is usually much larger than an unsecured loan, due to the collateral backing of the secured loan. Types of secured loans include:home loans, home equity lines of credit, vehicle finance or any recreational vehicle loans.

Advantages of secured loans

  • Lower interest rates
  • Higher borrowing limits
  • Longer repayment terms

Disadvantages of secured loans

  • You need a collateral to protect the loan.
  • The bank can repossess your assets if you default on the loan.
  • The longer repayment period can also be a disadvantage because you stay in debt longer.

What is an unsecured loan?

Unsecured loans in contrast, do not require any collateral on the loan granted and the risk here all falls onto the lender.  If the debtor fails to pay, the lender is unable pay itself back because of lack of collateral. Types of unsecured loans include: credit cards, personal loan and student loans.

Advantages of unsecured loans

  • The shorter payment terms mean you don’t have a lingering debt.
  • You don’t have to pledge your assets when applying for a loan.
  • The bank will not repossess your assets when you default on payment.

Disadvantages of unsecured loan

  • Higher interest rates
  • Lower borrowing limits
  • Shorter repayment terms

Who can apply for these loans?

Secured loans – anyone over the age of 18 who has collateral.

Unsecured loans – anyone over the age of 18 who has proof of income. To apply for a student loan, you need proof of university acceptance.

Until next time,
The MoneyShop.co.za Team