Secured or Unsecured Loans: Understanding the Difference

Secured or Unsecured Loans: Understanding the Difference

For those with no previous payday advance experience, understanding the facts and choosing the right type of loan can be overwhelming and pretty confusing. Nothing is worse than notarizing loan papers only to realize months later that this is not the loan you had been anticipating. Avoid any confusion by getting the facts sorted out before you even go any further in your search.

The Basics:
Loans can be categorized into two broad categories - secured and unsecured. The primary difference between the two loan types is whether the loan is guaranteed with a claim against some type of identifiable asset, or is solely based on the creditworthiness of the borrower. Either type of loan creates a legally enforceable debt between the lender and the borrower. The difference between the two loan types is most visible when a borrower does not repay the fast cash loan based on the loan guidelines, and the lender pursues other means to satisfy the outstanding debt.

What is a Secured Loan?
A secured loan is backed by a lien, or claim against some asset which is owned by the borrower. Lenders typically require this when the creditworthiness of the borrower is in question. The loan is granted in anticipation of the borrower acquiring a specific asset, or the loan amount necessitates its securitization. The security gives the lender a legal right to seize a borrower's specific asset in case the borrower defaults on the loan. The asset is considered encumbered, which means it typically cannot be sold or transferred by the borrower without the lender's permission, unless the debt is paid off. If the asset is transferred without the debt being repaid, the new owner takes possession of the asset subject to the lender's lien. A lender can pursue legal action to take possession of an asset identified in a secured loan agreement if the borrower defaults. Taking possession allows the lender to sell the asset and satisfy the outstanding debt. If the sales proceeds exceed the outstanding loan amount, the lender must legally give the excess funds to the borrower.