Secured loans are those for which a borrower keeps some asset as surety or collateral to borrow money.
A secured debt instrument simply means that in the event of default, the lender can use the asset to repay the funds it has advanced the borrower.
Common types of secured loans are mortgages and auto loans, in which the item being financed becomes the collateral for the financing.
With a car loan, if the borrower defaults on the payment, the loan issuer can seize the vehicle.
When an individual or business takes out a mortgage, the property in question is used to back the repayment terms; in fact, the lending institution maintains equity (financial interest) in the property until the mortgage is paid in full. If the borrower defaults on the payments, the lender can seize the property and sell it to recoup the funds owed.
Unsecured loan
Unlike secured loans, unsecured loans can be taken without keeping a collateral.
If the borrower defaults on this type of debt, the lender must initiate a lawsuit to collect what is owed. Lenders issue funds in an unsecured loan based solely on the borrower's creditworthiness and promise to repay.
Therefore, banks typically charge a higher interest rate on these loans. Also, credit score and debt-to-income requirements are usually stricter for these types of loans.
Examples of unsecured loans are credit card, personal loan, student loan, etc.
