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Secured and unsecured loans: What are the key differences?

Credit as a financial instrument is indispensable and in the United States, consumers depend on it heavily. Every major consumer spending like buying a home or a new car is usually backed by a line of credit and even the simplest daily needs like groceries and fuel are, in most cases, purchased on credit.

Although consumer credit is very popular, very few people actually have a clear cut idea of the different kinds of credit available to them. Broadly speaking, consumer credit can be classified as under:

  • Secured loans – A secured line of credit can be defined as a loan which is granted to a borrower who has pledged an asset of equal or greater value as collateral. In case the borrower fails to repay the loan or defaults on the loan, the lender may choose to confiscate and auction the asset against which the loan is secured. Classic examples of secured loans would include auto loans, title loans and mortgages.
  • Unsecured loans – On the other hand, unsecured loans and lines of credit are not extended against collateral assets. Lenders make their credit approval decisions based on the borrower’s credit history, his ability to repay previous loans and his FICO score. Since lenders face a greater degree of risk approving unsecured loans, they tend to seek legal action against borrowers who fail to repay their debts. Common examples of this form of credit include payday loans, credit cards, installment loans, etc.

Although this is just a very wide outline of the basic nature of consumer credit, there are varying definitions and classifications of the same. You can find out more about the subject here

could someone please tell me what is the differend...
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could someone please tell me what is the differende between a secure and unsecured loan?

An unsecured loan is made on the basis of a borrowers credit history and ability to repay and not on the requirement of pledging assets to the lender. A secured loan requires the borrower to pledge specific assets that become the property of the lender if a loan is defaulted.

Sub: #1 posted on Sun, 11/12/2006 - 07:02

Jessi Jessi

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Pay day loans are unsecured (except some could argue that they are secured by a wage assignment...)

Your car loan is secured by the vehicle.

A "title loan" is a secured payday loan.

Sub: #2 posted on Sun, 11/12/2006 - 10:15

DebtCruncher DebtCruncher
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