Personal loans are available to consumers for an immeasurable amount of reasons. The purpose of the loans dictates certain provisions that could apply to how they receive the loan and the terms of their contracts. When obtaining a personal loan, consumers must understand the differences between secured and unsecured personal loans.

Expectations of Lenders

Borrowers who receive a secured loan must provide some form of collateral. Typically, the loans are provided to purchase items such as automobiles or homes. The property that the individual purchases is used for the collateral in most cases. However, some personal loans require collateral when the borrower doesn’t have an extensive credit history. A secured loan is a viable choice for consumers who want to establish credit, too.

With an unsecured loan, the borrower makes payments in the same manner as a secured loan. However, secured loans are provided to borrowers with great credit scores and who have a more substantial credit history. The difference between the loans is that the lender won’t require the borrower to provide collateral.

What Happens if the Borrower Defaults on the Loan?

With a secured loan, the lender seizes the collateral if the consumer defaults on the loan. The collateral is sold through an auction, and the lender collects the proceeds. If the lender doesn’t collect the full balance of the loan, legal action is taken to collect the remaining value. The borrower remains responsible for any outstanding balances according to the terms of the loan contract.

With an unsecured loan, the lender is taking a chance on the borrower essentially. The lender doesn’t have the safety net of the collateral to collect outstanding balances. While they can take legal action, lenders are more likely to collect the value of a defaulted loan through an insurance claim.

Personal loans are secured or unsecured typically. The difference in the two major types of loans determine the expectations of lenders and how the loans are managed. Collateral is used for secured loans only, and unsecured loans require higher credit scores for most consumers. Borrowers who want to learn more about the different types of loans are encouraged to click this link now.