As a bank customer, you need to understand the differences between the type types of loans before you approach your bank for a facility. There are 2 common types of bank facilities: the secure loans and the unsecured loans.
Here are what you need to know about secure and unsecure loans.
A secure loan
It is a loan in which the borrower pledges some asset like a car, home or other valuable property including cash as collateral for loan. It then becomes a secured debt owed to the bank or creditor who gives the loan.
The debt is thus secured against the collateral and in the event that the borrower defaults, the creditor takes possession of the asset used as collateral. The lender may sell the collateral to regain some or all of the amount originally loaned to the borrower including interest that has accrued on the loan.
Example of secured loans includes Mortgage, Home Equity Finance, Asset finance, Auto loan, Term loan, Secured overdraft and Cash backed facility,
An unsecured loan
Refers to any bank facility that is not secured or collateralized by a lien on specific assets of the borrower in the case of failure to meet the terms for repayment.
Example of unsecured facilities include: Personal loans, Student or Travel facility types, salary overdraft, payment against uncleared effects, stock replacement facility, LPO Finance, Invoice Discounting Facility, Import Finance Facility and so on
Most secured facilities are borrowed to finance long term projects and comfortable living: Mortgage, Auto Loan, Project Finance, Asset Finance, Term Loan and so on.
While unsecured facilities are generally borrowed to take advantage of business opportunities that have short gestation or pay back period or fill an urgent financial need.
The borrowing limits for secure loans are usually higher than those for unsecured loans and banks are more comfortable with secured loans because of the presence of collateral.
The limit may however vary from one bank to another with most banks putting a cap to the maximum a prospective borrower can access. For instance a young borrower will be able to access higher limit than an agile borrower.
The tenure for secure loans are longer than unsecured loans. Mortgage can be paid over 20 years depending on the policy of your banks, age of the applicant and repayment source.
Unsecured loan generally has shorter tenure some short circle transaction like LPO Finance, Contract Finance Facility and Invoice Discounting Facility are availed very short tenors some as short as 90 days and 180 days maximum. Personal loan can be for a maximum tenure of 60 months in some cases.
Rates on secured floats are generally lower than unsecured loans. This is so because the bank faces a higher risk lending to a customer that have not provided any security and thus banks charge higher interest to mitigate the risk.
The approval process for an unsecured loan is usually quicker than for a secured loan because there are less paperworks.
Know Before You Borrow
Both secured and unsecured loans can differ a good deal from one bank to the nex. So it’s important that you have a clear understanding of how your loan will work.
What you’ll have to pay each month and over the life of the loan, information you are providing for the lender matters a great deal here. It will help the bank decides how to structure your loan for easy repayment.. Ask your bank to provide an explanation of all the details plainly, before you make your borrowing decision, make sure you can afford to pay back your loan in a timely matter without straining your budget.