While trying to acquire a loan you end up doing a fair amount of research trying to understand the terms of the contract, or simply the types of loans out there. There is no doubt that it is required certain level of financial education for borrowers to ensure that are getting the best deal.

One of the most common terms is secured and unsecured loan. This term has to do with the secureness of a lender company to get repay after authorizing a loan to a potential costumer. Yet, not all types of loan are secured, and these ones have better chance to get approved.

Secured Loan

So, there are secured and unsecured debts. Unsecured debts are the ones that are only backed by borrowers’ word – credit history. That is to say that the lender needs to trust the borrower records when doing a loan. In an unsecured loan, there is not asset to support the costumer debt, therefore all property from the borrower in theory will remain intact in case of unpunctuality on the payments.

Examples of unsecured loans such as credit cards or students loads are part of the daily debts most of Americans deal with. One of the features of unsecured loans have high interest rate – as you see with student debt, since the company looks for ways to get the most amount of money in the less time.

Consequently as you imagine, a secured loan is the opposite of unsecured. Here the lender includes in the contract and clause where the borrower give right of its property – cars, houses or any other asset. This is only applicable if the borrower won’t do the payments on time or declares bankruptcy.

By secured loan the lenders ensure somehow a repayment, in case the property given to ensure the repay doesn’t enough to call off the contract, the borrower will need to pay the rest. Therefore, car loans and mortgage are part of the secured loans.

In the car dealership world, secured loans are the most typical way to ensure repayment from the borrower. In the document the bank or lender company makes the costumer sign, there is clause where they allow the lender take possession of the vehicle while you do the payments. In some extreme cases, they will sell the asset to get the money back.

There is a big chance that once the company decides to sell the vehicle, the borrowers still owe some amount of money. This happens due to the car devaluates pretty much fast.

Benefits of secured loans

The main benefit of secured loan is the low interest rate. Although you can get relatively reduced rate by having a good score, secured loans have fixed percentage.

On the other hand, secured loans are easier to access and obtain: you may get them pre-approved with less documentation and even without co-signer. This also depends on the credit score and history.

Finally, secured loans are easier to get for shorter terms, thus costumer pay less interest for loans.

Yet, there are some considerations to take into account when taking a secured loan. One of them is that the company will retain ownership to the vehicle while the borrower is paying it. In other words, the car won’t have the borrowers name on it until the last payment is done.

Another consideration is that if the lender repossesses the vehicle the credit score of the borrower gets affected. This also damages co-signers if the contract has any, therefore in both cases the credibility of the costumers are affected.

Laura Pajaro is a freelance writer and blogger, who specializes in the auto industry and is currently working with Hi Lo Auto Sales of Frederick MD. Hi Lo Auto Sales is one of Maryland’s largest used car dealers, and operates two locations on Rt 40 and Rt 355.