A lot of people these days are still oblivious to how loans function and what they need to acquire them.  People who were able to get loans for the first time or those who have acquired numerous loans have either used their rented money for the better or made things worse by not being able to repay and getting into debt. 

Loans come in two forms.  One requires collateral and one does not.  Unsecured loans are the ones that don’t need collateral and loans that do are called secured loans. 

Secured loans are granted to borrowers only if they pledge an asset like their home.  This is a form of assurance where lenders are secured since they already have something that would compensate them in case the borrower defaults on payments.  In spite of pledging your property, any type of funding that is needed can be easily covered since secured loans offer a much higher amount of funds and interest rates are much lower.

Collaterals don’t just come in the form of house or any real property.  Other forms of loans require a different form of asset from the borrower.  Next to houses, cars are considered to have a sizeable worth (depending on the condition, mileage, and years) and secured car loans require a borrower’s car as the collateral. 

Both lender and borrower are also protected with secured loans especially mortgage loans.  While the house is the collateral, borrowers hold what is known as a warranty deed.  This is a form of warranty wherein mortgage borrowers are protected from having their homes repossessed while they are still paying the mortgage.  Meaning lenders who hold the trust deed could not just sell the property whenever they want to somebody else.  The purpose of trust deeds for lenders is to give them the right to reclaim the property from a borrower who defaults.

Unsecured loans can be granted to borrowers without them pledging any of their assets but there is a limit on the amount the customer can borrow compared to the amount offered by secured loans.  Other variations of loans are personal or consumer loans and business or commercial loans. 

Borrowers of unsecured loans have a lesser concern in terms of house repossessions because they don’t have to pledge anything at all.  However, since lenders have no form of security against borrowers, they are likely to put in much higher interest rates and add-in other charges.  Creditors also are more selective in granting unsecured loans such as credit cards, personal loans, etc. and the basis of granting or declining unsecured loan requests is by looking at the borrower’s credit rating.  Sometimes lenders also ask for some form of security on the borrower’s property especially if the unsecured loan comes in the form of a business loan.  These securities come in the form of a second lien on the borrower’s home, co-signer, or surety.