Unsecured loans don’t have any collateral behind them. For example, credit cards are short-term unsecured loans. They’re not backed by anything, but they’re given out based on your credit history and income. That’s also part of the reason the interest rates are so high if you don’t pay. Lenders can’t take collateral, so they try to extract more money.
With secured loans, you have to put something up as collateral. This happens naturally when you buy a home or a car, for instance. Lenders can try to seize those assets if you fail to pay on time.
Business owners who need lines of credit may also end up putting assets they already control up as collateral. Assets used include vehicles, real estate, stocks, and the like. Individuals who wants these loans may also use real estate and vehicles, but could additionally use things like jewelry or other high-value assets.
Now, there are advantages to getting a secured loan. You tend to get longer to pay off what you owe, since the lender knows there is an asset that can always be taken if needed, and those interest rates could be lower.
The risk, though, is that the assets can be repossessed in certain situations. You may enjoy those low interest rates at first, but, if you miss enough payments, you could wind up losing the loan and everything that you put up as collateral to get it in the first place.
When there’s a risk that this is going to happen, it’s critical that you known your rights as a consumer or a business owner. There may be legal steps you can take to protect your assets.
Source: Financialized, “Types of Collateral for Different Loans,” accessed March 10, 2017
