If you’re on the market to obtain a loan, it’s important to know what kind of loans are out there, what you are eligible to receive, and more importantly, how much that loan is going to cost you in the long run. Loans offer a variety of interest rates and are based on terms of payment that can be short term or long term. One important differing factor is whether the loan is secured or unsecured.
Unsecured loans are given out with no collateral or security to back them. They are also known as “signature loans”, because you basically offer the bank or lender your signature in exchange for your loan money. Though it may sound easy to obtain an unsecured loan (i.e. just walk into your local bank branch, sign a piece of paper, and get a loan), it’s not. Unsecured loans often require you to go through a stringent application process where your credit score, income, and current debt holdings are carefully scrutinized. With no security to back the loan, the bank or lending institution is taking on a risk to lend you their money, as they have no way to recoup their funds in the event that you cannot make your loan payments. Unsecured loans come in the form of traditional bank loans, payday loans, or registration loans.
Secured loans have some form of physical collateral to back them up, whether it is a house, a car, or even your brokerage portfolio (known as a non-purpose securities-based loan). In the event that you can’t come up with the money to repay the loan, your lender has the right to claim the asset tied to the loan. A title loan is a form of secured loan, where you provide the clear title of your car to the lender as security against your loan. The lender will require you to leave the physical title document in their possession, upon which you get it back once you pay back your loan in full. Secured loans maintain very strict rules for repayment and heavy repercussions should you neglect to pay back your loan.
Your financial situation, credit history, and assets will determine which loan you are eligible to receive, whether secured or unsecured. Find out from your local bank or lender what type of loan will work best for you and what the conditions are for interest and repayment. There can be hidden fees and surprisingly high interest rates tucked into the Terms of Agreement, so make sure to find out all the details of your loan before you agree to sign.