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Debt Handling - The Difference Between Secured And Unsecured Loans

Lenders and borrowers always have to decide between extending or accepting a secured or an unsecured loan. What is the difference between the two and how do these loans impact each party? A secured loan involves collateral being put up against the loan. A home loan is one common type of secured loan.

If the borrower defaults on the loan, the lender has the right to repossess the collateral (the home in this case).The lender is allowed to foreclose on the property for a single missed payment; of course, this doesn't happen in real life.

The lender would much rather avoid going through the lengthy process of foreclosure and then having to deal with selling the property.This is why lenders don't foreclose when a single payment is missed.

It takes many months before a lender will do anything more than simply send letters reminding the borrower to make their payments or face further action. No matter what the state of the real estate market, lenders don't want to take on the burden of having to foreclose and sell the property unless it becomes absolutely necessary to do so. However, borrowers should understand that doing so is within the lender's legal rights.

Whether or not they choose to do so is up to the lender. Even in the case of unsecured loans a creditor is able to legally seize assets if the borrower defaults on their loan. These seizures are much easier to obtain through straight forward legal procedures.

One thing to keep in mind is that lenders would still much rather to negotiate with a borrower to come to a repayment plan than to go through any sort of legal proceedings and seizing property. Another difference between unsecured loans and secured loans is that since there is no collateral put up at the time of the borrower taking out the loan, the interest rate for an unsecured loan will typically be higher than that for a secured loan.

The lender charges a higher interest rate to reflect the higher level of risk they assume by extending a loan which is not backed by collateral. Borrowers are much more motivated to make payments in a timely manner when they stand to lose assets than they are when a loan is unsecured.

There are different pros and cons for both parties with secured and unsecured loans. If you don't have acceptable collateral (or would prefer not to put it against a loan), then you may find it preferable to pay a higher interest rate. When you're in need of a loan, you'll have to determine the risks and the rewards of the two types of loans depending on your own circumstances.