When you apply for a loan, maybe you hear the terms “collateral” or “guarantee.” Maybe you’ve even heard the term “lien” or “risk,” and these are important terms that you should know. These terms relate to either secured or unsecured loans. Every loan, whether it’s a personal or a business loan, falls into one of the two categories.

For the purpose of keeping things simple, this article will focus on personal loans like those available at http://westernshamrock.com and through similarly licensed lenders. Generally speaking, however, most loans have similar aspects and stipulations. It’s just a question of whether they are secured or unsecured.

Secured Loans and What They’re Used For

Secured loans are loans where collateral is used as a guarantee to the borrower. To put it more simply, collateral is basically any item you own that has value, and it could be practically anything, from an expensive television and home theater set to jewelry, vehicles and even houses. What you will be doing is offering property as collateral to the lender, and if they accept it, you will get your loan.

Banks and other lenders don’t always ask to keep your collateral unless it’s a smaller item like jewelry. Usually what they’ll do is put a lien on it. A lien is basically an agreement that you can keep your collateral such as your car or your house while you’re paying off your loan, and it will be removed once you have finished paying. But if you fail to make payments on your loan, the lien gives the lender the right to take possession of the collateral and sell it to pay off the loan balance. Secured loans are therefore typically auto loans and home mortgages since the loan is used to buy the property, but you could also make a deposit on a secured credit card or something similar.

Unsecured Loans and What They’re Used For

Unsecured loans are loans that do not require any collateral in order to get approved or to use. The lender just simply has you sign an agreement that in no uncertain terms says you will repay the loan. Personal credit cards are basically a form of unsecured loans, though they are technically lines of credit where you only pay back the funds you used and they’re automatically renewed. But there are some unsecured loans where you’re given a lump sum of cash and you have to repay all of it regardless of how much of the funds you used. Different lenders offer different unsecured loans for different purposes, though debt consolidation, which is paying off all your creditors with one loan and then paying it off is a common unsecured loan.

Which Is Better?

The most common answer to which loans are better in secured vs. unsecured loans is “it depends on your circumstances.” Sometimes you’re better off getting a secured loan if you need a lot of cash and your income isn’t very high, or your credit score isn’t good. Secured loans sometimes can have more favorable terms such as not weighing your credit history as heavily, and they may come with lower interest rates and more favorable monthly payments. But because they are secured, you will want to be careful about the kind of collateral you could risk losing.

Secured loans may be better up front if you don’t want to put up collateral, but these loans can be harder to qualify for. Lenders will usually want to make sure you have a good steady source of income so that you can make your payments, and they usually will want you to have good credit too. These loans are riskier to the lender and could come with higher interest rates, but if you do use them wisely and make your payments on time, you could also make your credit score even better. Also keep in mind that even though you don’t put up collateral to get these loans, if you fall too far behind in your payments, the lender could take legal action against you and end up getting possession of property.

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