The definite way to get out of a financial hassle is to take out a loan. The loans given out can either be secured or unsecured. To know which one to take out depends on the individual borrower. The loan product should fit in with the borrower's financial capabilities. They should take out a loan with the lowest rate and other chargeable fees. But, what is the difference?

Unsecured Loans

Unsecured loans do not require any form of a security pledge for a borrower to get advanced with loan money they need. The lender depends on a contract signed between themselves and the borrower to avail the money. The contractual responsibility is a kind a memorandum of understanding between the borrower and the lender promising to pay back the loan advanced. Unsecured Loans are risky to give out than the secured loans. This makes the amounts that can be availed to be comparatively smaller. The repayment duration is also shorter. Its rules, regulations and conditions are very stiff. A lender determines what they can advance to a particular borrower by their credit history and the amount of money they earn. The higher a person earns the higher the amount of cash they can get.

Merits of Unsecured Loans

* It protects the equity of your property. The loss of your home, for example, your house is reduced.

* No collateral is needed to secure the loan.

* For smaller purchases, it is more economical than the use of credit cards.

* The approval and processing of the loan is faster as no lengthy prerequisite is required with these loans.

Demerits of unsecured loans

* Rate of interest and other chargeable fees are quite high

* They are expensive over a long period.

* They are risky to both the lender and the borrower when it comes to payments and repayments. That is, incase the borrower defaults upon the loan, the lender looses money while the borrower's credit history deteriorates.

Secured loans

To secure this type of a loan product, the borrowers must produce one or two of their property to act as security against the loan.

Merits

* The borrower can be advanced with bigger sums of money in comparison to unsecured loans.

* The repayment schedule is more flexible. It is spread over a longer period.

* Since the lender is certain that the borrower will pay back the advanced amounts of money, they can advance any amount of money the borrower may request. The pledged asset acts as the surety.

* Rates of interest and other chargeable fees are lower as compared to unsecured loans.

* Even those borrowers with a bad credit score can be availed with the loan amounts they requested. The asset pledged reassures the lender that the borrower will pay back the loaned money, for them to claim back their expensive asset.

Demerits

o Incase a borrower fails to pay back the loan as agreed, their pledged asset can be repossessed by the lender to offset the borrowed money.

o The loan application procedure is tedious and lengthy to both the lender and the borrower.

Lastly, repaying debts over a long duration of time becomes very expensive to the borrower. The shorter the repayment time, the lesser a borrower pays and the vice versa is true. However, secured loans are cheaper as compared to unsecured loans. Secured loans are more suitable to people who possess assets that they can pledge against the loan they requires.

Defaulting on any loan tarnishes the borrower's credit worthiness and can lead to grave legal and financial consequences.