Understanding Why Lenders Prefer To Offer Secured Loans Over Unsecured
When a person is searching for a loan they are going to find there are two basic types of loans: secured and unsecured
. In the majority of cases they will also see that secured loans are by far more available then unsecured loans. There is a very good reason for this and that is why most people will end up getting a secured loan.
Secured loans are a loan that is secured by collateral. Collateral is something that the borrower puts up for the loan. An example is in the case of a home loan. When a person is buying a home the home becomes the collateral.
What this means is that if the borrower does not pay their loan the bank then becomes the owner of the home. They can sell the home to get the money owed to them. The collateral a borrower puts down must be something valuable that could be sold to make up the cost of the loan.
Banks and other lenders prefer a secured loan over an unsecured loan because with a secured loan they have some guarantee of getting their money back. When a lender lends money they are basing their decision on many factors. They usually will look at the borrowers credit history to get an idea of the borrowers ability and likelihood of paying them back.
They also look into a borrowers finances. This tells them if the borrower can afford the loan. Lenders understand, though, that even if a person can afford a loan and has the most perfect credit record does not guarantee a borrower will not default on a loan.
A lender looks at secured loans as less of a risk then unsecured loans. With a secured loan they are getting something in return for the loan that they know they will be able to sell, if need be, and recoup some of the money owed to them.
Secured loans are still a risk for the lender. Even though a borrower puts up collateral, the chances of the collateral actually equalling the amount of the loan is not likely.
This is especially true of auto loans where the auto being purchased is used as collateral. If the lender should need to sell the auto to recoup their money they will not likely get the full amount owed to them.
This is why secured loans are still not simple to get. A secured loan still requires the borrower to show they will pay back the loan. Lenders are still wanting to make as much off the loan as possible, so they are going to want to be paid back, not have to collect through collateral.
Secured loans are more available then unsecured loans simply because they are lower risk. Lenders like to have that added security of collateral. They like the idea that the borrower is willing to out themselves at risk too.
With a secured loan both the lender and borrower are assuming risk so it is a more even playing field then with an unsecured loan. That is why borrowers will find secured loans to be more available then unsecured loans.
Understanding Why Lenders Prefer To Offer Secured Loans Over Unsecured
By: Jenna Sawin
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