What Are Secured & Unsecured Creditors?

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When you borrow money from a lender, you may be required to put up some kind of collateral to protect the creditor. If this is the case, you are taking out a secured loan from the creditor. When you borrow money that is not tied to any particular asset, this is known as an unsecured loan. Both of these loans can be beneficial, depending on your situation.

Secured Creditors

  • Secured creditors are those which require some kind of collateral to be tied to the debt that they issue. A common example of a secured creditor is a mortgage lender. With a secured creditor, you could have a piece of collateral, like a house or a car, that is subject to repossession or foreclosure if you cannot repay the debt. This way, the lender can simply take the property and sell it to repay the debt that you owe if you do not pay.

Unsecured Creditors

  • By comparison, unsecured creditors do not require any kind of collateral to be used to secure a loan. Of the most common examples of unsecured creditors is a credit card company. When you get unsecured credit, the lender looks at your credit history to determine if you are creditworthy. The loan is secured only by your good faith, instead of by anything tangible. If you do not repay the debt, the creditor can file a lawsuit against you.

Interest Rates

  • When comparing these two types of debt, look at the interest rates offered by lenders. With secured credit, you can typically get a lower interest rate than you can with unsecured credit. This is because the lender is in a position of much lowered risk when dealing with secured credit. If you default, it is relatively simple for the lender to get its money back --- by taking the property attached to the debt. With an unsecured debt, lenders have to charge more in interest to pay for the risk of default.

Approval

  • If you need a loan, it is often easier to get approved for a secured loan than for an unsecured one. When you apply for a secured loan, you are willing to put up a piece of collateral that the lender can take. This means that the lender will be more willing to work with you because of the lower risk. If you want an unsecured loan or line of credit, you will have to display a strong credit profile.

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