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Secured vs Unsecured Loans
Secured loans and unsecured loans have positive and negative aspects both for lender and borrower. What are some of these aspects? What is the difference between a secured loan and an unsecured loan?
The most common type of secured loan is a mortgage. The Borrower makes a commitment to repay the loan in accordance with its terms. The mortgage is secured by the Borrowers home which means if he fails to pay the lender can confiscate the home as payment. All secure loans and guaranteed by some type of real or personal property which can be taken in the event of a default of payment.
In theory, that means that if you miss a payment on the home loan, the lender has the legal right to foreclose and sell the property. In practice, that never happens. Among other reasons, lenders know that reclaiming a house is a long, unpleasant chore and they would be left with the necessity to sell the home to recoup the money.
No lender is going to do that for such a small misstep as missing a single payment. Even if the borrower lags by several months, at most the lender will typically send a series of firm letters demanding payment before taking any other action. Even in an active sellers market lenders have many more important things to do and dont want to undertake the effort of removing a homeowner and selling a house.
Nevertheless, its wise to realize that the lender has this right. How important or not that right is can be judged by recognizing that even with an unsecured loan, creditors have the legal right to seize assets like salary, stocks and property. This requires only undertaking a relatively simple and inexpensive legal procedure to declare the borrower in default.
However, taking legal action is still an expense for the lender and requires some time and effort that they would rather not sacrifice. In most cases, they prefer to work out a payment arrangement.
Typically the interest rate on an unsecured loan is higher than secured loans. This is because the lender is taking a greater risk since the money is not secured by assets or property.
Since the lender will incur more loss on unsecured loans defaulted on, they make up for this potential loss by charging a higher rate of interest. Sometimes that higher interest rate will encourage borrowers to select a secured loan. Lenders prefer that because the borrower has more incentive to repay the loan when it is attached to their property.
Secured vs Unsecured Loans
The most common type of secured loan is a mortgage. The Borrower makes a commitment to repay the loan in accordance with its terms. The mortgage is secured by the Borrowers home which means if he fails to pay the lender can confiscate the home as payment. All secure loans and guaranteed by some type of real or personal property which can be taken in the event of a default of payment.
In theory, that means that if you miss a payment on the home loan, the lender has the legal right to foreclose and sell the property. In practice, that never happens. Among other reasons, lenders know that reclaiming a house is a long, unpleasant chore and they would be left with the necessity to sell the home to recoup the money.
No lender is going to do that for such a small misstep as missing a single payment. Even if the borrower lags by several months, at most the lender will typically send a series of firm letters demanding payment before taking any other action. Even in an active sellers market lenders have many more important things to do and dont want to undertake the effort of removing a homeowner and selling a house.
Nevertheless, its wise to realize that the lender has this right. How important or not that right is can be judged by recognizing that even with an unsecured loan, creditors have the legal right to seize assets like salary, stocks and property. This requires only undertaking a relatively simple and inexpensive legal procedure to declare the borrower in default.
However, taking legal action is still an expense for the lender and requires some time and effort that they would rather not sacrifice. In most cases, they prefer to work out a payment arrangement.
Typically the interest rate on an unsecured loan is higher than secured loans. This is because the lender is taking a greater risk since the money is not secured by assets or property.
Since the lender will incur more loss on unsecured loans defaulted on, they make up for this potential loss by charging a higher rate of interest. Sometimes that higher interest rate will encourage borrowers to select a secured loan. Lenders prefer that because the borrower has more incentive to repay the loan when it is attached to their property.
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