What's the difference?
When borrowing from financial institutions, it is important that you analyze the types of products and services they provide that will suit your financial situation. Lenders’ loan packages often fall into one of two broad categories: secured loans and unsecured loans. Both loan types have one main difference – one is protected by an asset and another isn’t protected. Let us explore how both loan types operate, and which is best for you.
Our personal loans are generally secured using 1 guarantor.
Our small business loans are secured using motor vehicles, appliances or furniture.
Secured Loans
Secured loans are the most common way to receive larger loan sizes - they are linked to a piece of valuable collateral, such as a motor vehicle or home appliances. With a secured loan, lenders will hold the deed or title until the loan is paid off, and they have the right to repossess the asset(s) if the borrower defaults/fails to repay the loan. Putting your property on the line is assurance that you will repay the loan.
Although lenders repossess property for defaulted secured loans, you may still have an outstanding balance. This occurs when proceeds from the property sold are not enough to completely cover the balance owed. In this case, you are responsible for paying the difference.
The risk of default on secured loans to the lenders tend to be low since borrowers have more to lose by neglecting their financial obligations; therefore, secured loans have lower interest rates, higher borrowing limits, and longer repayment terms.
Additionally, some lenders may not require assets to secure a loan, instead, they require guarantors, who are eligible based on their financial standings. The guarantor is the person who certifies your credibility; they confirm that you will be able to repay the loan borrowed. Guarantors are basically your back up, as they agree to make payments for you if you are in default. They are required to co-sign on a loan agreement before the loan is disbursed, and the contract is usually explained to both parties highlighting the terms and conditions.
Examples of Secured Loans:
Personal loans
Business loans
Mortgages
Motor vehicle Loans
Unsecured Loans
While secured loans are protected using assets, unsecured loans are not. In other words, if you default on the loan, the lender cannot automatically take your property; they must initiate a lawsuit to collect the funds owed. Lenders issue unsecured loans entirely on the borrower’s creditworthiness and promise to pay. As a result, the risk to lenders increase; therefore, interest rates tend to be much higher than secured loans and the repayment terms are often shorter. In addition, unsecured loan sizes are generally smaller, debt-to-income requirements are stricter, and they are only accessible to the most credible borrowers.
To qualify for an unsecured loan, you must be in a stable financial situation. If you do not know the status of your credit, you can request a report from any of the credit bureaus in Jamaica, namely Credit info Jamaica Ltd., CRIF Information Bureau Jamaica Limited, or Credit Information Services Ltd. As stated earlier, the risk to lenders increases, so they reduce this by assessing your track record as a borrower to indicate how your loan will proceed.
Examples of Unsecured Loans:
Credit Cards
Personal (Signature) Loans
Student Loans
Which is right for you?
There are a few factors you must consider when deciding on a secured loan versus an unsecured loan. A secured loan is normally easier to obtain, as there is less risk to the lender. If you have an unsatisfactory credit history, lenders will be more likely to provide you with a secured loan than an unsecured loan.
Although a secured loan comes with higher borrowing limits and lower interest rates, you are putting your property at risk. However, if you are qualified for one, it is usually a smarter money management decision than an unsecured loan. Unsecured loans do not put your property at risk, but they may be more difficult to obtain and have higher interest rates and shorter repayment terms than secured loans.
Tip: At Regions Financial Services we conduct free risk assessments to provide the best solution for each client’s financial status.
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