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Understanding the differences between secured and unsecured loans.
Secured loans are protected by an asset. The item purchased, such as a home or a car, can be used as collateral. The lender will hold the original Sales Deed or title documents until the loan is paid in full, in case of a Home Loan. Other items can also be used as collateral, such as stocks, bonds, etc. Secured loans are the most common way to borrow large amounts of money.
Secured loans can also be Home Equity Loans or Loans against Property. These loans are offered using your home as collateral. The risk is, if you can’t repay a secured loan, the lender can sell your collateral to pay off the loan.
Unsecured loans are not backed by any security and include loans like Credit Cards, Student Loans, or Personal Loans. Lenders take more risk in this type of funding because there is no asset to recover in case of a default, which is why the interest rates are higher.
An unsecured lender believes that you can repay the loan based on your financial resources, including factors like character, capacity, capital, and conditions.
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