Life is unpredictable and we constantly find ourselves in emergency situations where we need to apply for a personal loan. This is a norm for a number of families where things are constantly breaking or getting lost, and children need medical attention where a piggy bank might not be a viable choice. The obvious decision becomes a loan from a credit facility and a reputable one is a must.
The next step is choosing a loan that best suits your needs. There’s quite a wide selection of loans, however, these can be divided into two categories: secured and unsecured loans. It’s vital that you know the pros and cons of each as this will help you to choose the right one. The same could be said about understanding credit score as this affects both loan applications.

Secured Loans

Secured loans are protected by an asset or some form of collateral. This has to be an item which is owned such as a car or home as this can be security that the loan will be paid back. This makes secured loans ideal as these are safer for the lender and in most cases affordable for the one borrowing. Due to the low risk, there are lower interest rates. Should the borrower fail to make the payment, the risk is that the bank can claim the asset or collateral offered as security. For some, this means possibly losing a home or car.

Advantages of secured loans

  • Account information
  • Payment history
  • Public records such as bankruptcy
  • Total debt
  • Number of inquiries for your credit report

Disadvantages of secured loans

  • A home or car can be lost due to payment failure
  • Longer repayments periods come with higher interest charges

Unsecured Loans

Unsecured loans are not tied to any assets, this means that the lender takes the highest risk with this type of loan when compared to a secured loan. To make up for the risk, lenders charge higher interest which in turn makes it an expensive way to finance large expenses such as a house or a car. This also makes unsecured loans ideal for covering smaller personal expenses such as study loans or personal loans. Advantages of unsecured loans

  • Money for emergency expenses like unexpected medical bills where there’s no health insurance in place.
  • Money to pay for assets that can pay for themselves
  • Money for student expenses

Disadvantages of unsecured loans

  • Higher interest rates when compared to secured loans
  • Limitations to the amount you can borrow as these amounts are tied to what you earn