The Different Benefits Between Secured and Unsecured Loans

Jul 25, 2019

Whether you are looking to finance a start-up business or simply seeking the means to pay off debts or medical expenses, there are a myriad of loans you can choose from that would best suit your needs and situation. However, no matter what type of loan it is, all fall under two main categories: secured and unsecured loans. 


The primary difference between the two is the presence or absence of collateral, or in simple English, an asset used for the lender’s security against non-repayment. While many would prefer to not put up collateral, both types of loans provide an equal amount of advantages and disadvantages that should be carefully weighed in. On that note, we’re here to breakdown the differences and help you choose the best one for you:

 

What is a Secured Loan?

These are loans that require the borrower to put up an asset or collateral as a means of surety for the lender. This means that failure to repay the funds allows the lender to legally take hold of your asset as a means to repay the missing funds. Chances of approval are high because secured loans typically show that you have the financial capability to support a loan, as well as perfect for those who want to strictly stay on track due to the collateral serving as the much-needed motivation most borrowers need to diligently push payments through. 

The common types of secured loans are mortgages and auto loans, wherein a house or a car is used as an asset to avoid untimely payments. Not to mention, the lender has full responsibility and legality to hold the title of the house or car until the debt is paid in full. 

 

What are the Risks and Benefits of a Secured Loan?

The risks tend to be low when it comes to secured loans due to the borrower having too much at stake to neglect financial obligations. This means that most people who are on secured loans have higher chances of paying off debts, while the benefits involve lower interest rates due to the given collateral in case of a failed payment.

 

What is an Unsecured Loan?

As its name implies, unsecured loans require no security, which is what makes it appealing to many prospective borrowers in the first place. This means that borrowers are approved simply on their creditworthiness and promise to repay, which can be potentially dangerous if given to an undisciplined individual. In that regard, due to the lack of security, unsecured loans typically have higher interest rates than secured loans. The best situation to use unsecured loans are for medical bills, retail installments, or contracts involving a gym membership or a sports club. 

 

What are the Risks and Benefits of an Unsecured Loan?

Due to an unsecured loan’s lack of security, it carries a higher level of risk than its asset-backed counterpart; not to mention, the interest rates are noticeably higher. The benefits, however, include a faster application process than a secured loan. 

A monthly instalment is also provided, though it typically requires repayment within a shorter period, such as 72 months. In that regard, both have equal pros and cons to consider. Just remember that it takes two to tango, so when handling financial issues, be sure to pick the right partner that will suit your style and not drag you down. 

If you’re looking to take out a personal loan in South Africa, Hoopla Loans is your best option. Get in touch with us today to see how we can help.