5 Key Differences between Secured and Private Mortgage Loans
There are multiple types of loans but all of them essentially fall under two categories – secured loans and unsecured loans which is also known as private mortgage. The basic difference between them is that one is protected by a collateral and the other is not. Both types of loans have their own advantages and disadvantages but it is imperative that people know more about them so that they can utilize their loans more effectively.
Here are five key differences between secured and unsecured loans people need to be aware of before taking out a loan.
Secured vs. Private mortgage Loans
As said earlier, in order to obtain a secured loan, the borrower will have to pay something as collateral, for example a car or a house. On the other hand, borrowers who do not have any financial asset are only eligible for unsecured loans, for example credit card loans and personal loans. In case of private mortgage, you take mortgage from someone you know like friend, family member or colleague and you don’t have to submit anything for collateral. But this doesn’t mean there is no agreement signed. All terms and conditions are set and signed so that both parties are secure in this sense. Private mortgage is although unsecured but it has its own benefits.
Amount of Money
If you are taking out a secured loan, you can borrow a huge amount of money in exchange for a collateral. When you have completely paid off your debt, you can then take back your financial asset. However, unsecured loans do not allow you to borrow a big amount of money because the lender is essentially taking a risk by lending you money without any security in the first place.
Secured loans usually come with a lower interest rate as compared to unsecured loans. The principle stays the same, since unsecured loans are without collateral, the lender has to make sure he or she gets their money back on time. The interest rates for unsecured loan can range between 10% to 28%.
The Risk for Lenders
Lenders of secured loans have lower risk since they can confiscate the collateral if the borrower fails to pay off his or her debt completely. On the other hand, lenders of unsecured loans have higher risk because the only way they can get their money back is through the borrower. If the borrower of an unsecured loan fails to repay his debt, he will face legal consequences.
The Risk for Borrowers
Taking a loan involves risks not only for lenders but for borrowers as well. Borrowers of secured loans face higher risks because they can lose a valuable financial asset if they failed to make repayment on time. Borrowers of unsecured loans, on the other hand, face lower risks because they won't have to lose anything valuable. However, they will suffer legal consequences and even bankruptcy if they have no way of repaying the debt.