Secured and Unsecured Credit

Secured and Unsecured Credit background

Credit is either secured or unsecured. In order to determine what terms the bank will offer, they must consider the risk. What are the odds that you, the borrower, will pay back the loan? The lower the risk, the better the terms you can obtain.

A secured loan utilizes an asset that guarantees the loan. In other words, if you fail to make the agreed payments, the lender will take the asset. Typical secured loans include homes, cars, boats, motorcycles, and other property.

The advantage to a secured loan is that the lender’s risk is lowered, giving the borrower better rates and terms. This may result in a lower monthly payment and a lower interest rate. The loan term is associated with the life of the asset. A car loan is generally 4 to 6 years because after that time period the value declines significantly. A home generally offers loans of 30 years or more because it is an asset that tends to appreciate in value.

Unsecured loans have a higher risk to the bank because they are more difficult to collect on, if the borrower cannot make timely payments. Unsecured credit is said to be backed by the full faith and credit of the borrower. If you cannot make payments, the lender has very little recourse. For this reason rates are much higher and the terms are less favorable.

To establish the level of risk to the lender, will focus on the borrower’s credit score. This is established by a history of how you pays the bills. Most lenders report a payment history to credit bureaus each month. The credit report maintains the data, and a scoring system establishes a credit score that represents your risk. The higher the score, the better terms you can gain from a lender.

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