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The Differences Between Unsecured And Secured Debt
If you need to borrow money, start getting to know the types of loans available for your purpose.
Think that taking on debt is a bad move? It’s time to change that mindset. When it comes to your finances, applying for loans are useful in easing your cash flow and providing you with the necessary resources for crucial needs.
Consider, for instance, buying a car, pursuing further education or unexpected emergencies – your current funds might not be sufficient to take on these potentially large expenses in one payment alone.
But, taking a loan is helpful if you need immediate access to funds in a safe and reliable way.
Before you enter the world of loans, you will also need to understand what is more suitable for your needs and circumstances.
There are two categories of loans available: secured and unsecured.
To take on a secured loan, the borrower must be able to commit assets for collateral. These assets are tangible items, such as cars, property and other kinds of inventory that can be used to pay off the debt, in the event of a default. The amount that one can borrow is usually based on the value of these assets.
In contrast, an unsecured loan depends on the borrower’s capability to pay. Instead of using assets, one must provide credit scores and be assessed before they can borrow. Because these loans rely solely on the borrower’s ability to clear the debt, such loans are deemed less secure or ‘unsecured’ compared to those backed by collateral.
These differences are also important in how secured and unsecured loans are managed by banks and other licensed money lenders, especially with regards to interest rates and repayment terms.
With your financial circumstances and the purpose of your loan in mind, consider whether a secured or unsecured loan may be more suitable for your needs. Here’s a quick look at the other necessary details to consider.
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SECURED LOANS |
UNSECURED LOANS |
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Examples of loan |
Buy Now Pay Later schemes, student loans, credit cards, personal loans, debt consolidation plans, CashPlus, balance transfer |
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Interest rate |
Lower |
Higher |
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Repayment terms |
Longer, up to 30 years |
Shorter, up to 60 months |
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How To Qualify |
Pledged collateral such as property, cars, etc. which can be used to pay off debt if payments are not met |
Credit report, based on your capability to pay |
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Pros |
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Cons |
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Credit report, based on your capability to pay |
Still wondering which loan works better for you? That all depends on what methods you have to pay off your debt as well as your financial goals for the future.
But, you shouldn’t be intimidated about taking on some debt. Depending on what you’re using the loan for, your debt could be ‘good’ for you too! Learn more about the differences between good and bad debt and what they mean for your finances here.
