Secured loans vs. unsecured loans

Created: 14.03.2019

Security

Probably you’ve come across the terms secured and unsecured loans, but what it means? When lending funds to others, the security of the debt is relevant, it refers to granting rights over an asset with financial value giving a lender the security that money can be repaid through the sale of the asset.

 

What is a secured loan?

Secured loans are often granted with a real estate, cars, equipment or other valuable assets as collateral. Those loans can be of two main types:

  • Financial leasing, when the buyer purchases the assets with a loan and the asset being purchased often becoming the security for the loan;
  • Leaseback financing, the owner of the asset gives the asset as collateral to obtain a loan.

The lender gets the mortgage, the car title or other document defining the new ownership. If for any circumstance, the borrower fails to repay the loan, the lender is able to sell the secured asset in order to recover and apply proceeds against the full amount borrowed. If the sale of the asset does not cover the amount owing, then the borrower will still owe the short fall.

 

Investment possibilities?

Professional investors were the only ones that able to invest in the secured loans, through MBS and ABS, until the Crowdfunding democratized the access to this segment of private debt. In Europe there is several platforms that non-professional investors can invest, with direct lending mostly in the Real Estate Crowdfunding platforms and in lending marketplaces, buying claim rights of prefunded loans, like mortgage loans, car loans or pawnbroking loans, some of them offer loans with buyback guarantee if the loan becomes late.

Real Estate Crowdfunding platforms include:

Crowdlending Marketplaces include:

 

What is an unsecured loan?

Unsecured loans have more risk for lenders because no security asset is provided by the borrower and simply relies on credit worthiness and ability to repay the loan of the borrower. This means if they fail to repay the loan, the lender has to take them to court to recover the debt. Because an unsecured loan represents a higher level of risk for the lender, the interest rates on this type of loan are usually significantly higher and are often grant with small amounts. This higher risk of the unsecured loans generally comes with a higher interest rate than secured loans.

 

Investment possibilities?

The non-professional investor is now also able to invest in this area of debt. The most common loan types are the short-term loans, personal loans with installment payments and line of credit. There are numerous platforms that give the opportunity to invest in unsecured loans, also in two types of investment, through direct lending, known as P2P Lending, and in lending marketplaces with prefunded loans. Because of the higher risk of the unsecured loans, there is a more common availability of buyback guarantee to the loans that became late and focus in the platforms with buyback guarantee.

Crowdlending Marketplaces include:

 

If you like to invest in secured or unsecured loans, just follow the links to the platforms. Some platforms offer sign-up bonuses through referral links.

* See how to get the bonus in the post “P2P Lending & Real Estate Crowdfunding: Promo codes“.

 

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