You will see both secured and unsecured personal loans advertised when you shop for loans. It is in your best interest to know the difference.
As you know from last week, a lender sees making any loan as a risk. They look at borrowers and see that some loans are bigger risks than others. All lenders try to mitigate the risks they take. Securing a loan is one way of doing that, but not all personal lenders do it.
Personal loans are “secured” with collateral. The collateral item is usually worth as much as or more than the original loan amount. The borrower agrees that if they fail to pay, the lender has the right to take the collateral. One example is a mortgage. Because a mortgage finances a home, if a borrower defaults on that loan, the lender will take the home in a foreclosure. On a smaller scale, payday lenders will often make borrowers write out a check when they take out the loan. If they don’t repay or re-up their loan on time, the lender will cash the check, using their collateral.
Unsecured personal loans do not use any kind of collateral. Unsecured personal loans are sometimes called “signature” loans. That name refers to the fact that the lender has nothing but the borrower’s signature on their contract. When a lender makes an unsecured personal loan, we are saying that we trust you to manage your own repayment. We trust you to repay your loan because you want to keep your word. We don’t feel the need to hold a threat over your head – we know that you are an adult, and we treat you like one.