What is the difference between a secured and unsecured loan?
When deciding to borrow money, it is extremely important to understand the rights of the creditor with respect to your property. The creditor’s claim to your property depends on the type of loan you have. There are two types of loans: a secured and unsecured loan. Read on to discover the difference between these two loan types.
What is a secured loan?
You will have acquired a secured loan if you agree to put up your own property as collateral in return for the loan amount. Common forms of collateral are your house or your car. If you cannot repay the loan about to the creditor, they can sell the collateral asset to recover their money.
Example: Ashna takes out a personal loan for $25,000. In return for the loan, the bank have asked her to put up collateral. Ashna puts up her car as collateral for the loan.
What is an unsecured loan?
An unsecured loan is not secured against collateral property. The implication for this type of loan is that the risk to the creditor is much higher than for a secured loan. The risk is that you will default on your loan payments and the creditor will not be able to recover their money.
To account for incurring a higher level of risk, the creditor will usually charge a higher interest rate on unsecured loans compared to secured loans.
Example: Edward, in similar circumstances as Ashna, takes a personal loan for $25,000. This loan type is unsecured, so he does not put up any property as collateral. His interest rate is 2% p.a higher than the interest rate of Ashna’s loan.
It is a good idea to talk to a business lawyer before entering into a loan agreement to make sure you fully understand your rights and obligations. They can assist you in figuring out whether a secured or unsecured loan is right for you personally or for your business.
LawPath also has customisable loan agreements that you can use to support the growth of your business.
Need more help? Contact a LawPath consultant on 1800 529 728 to learn more about customising legal documents, obtaining a fixed-fee quote from Australia’s largest legal marketplace or to get answers to your legal questions.