There are many structured products available in the market today. There are life insurance policies for people who want to secure their financial future, and there are securities for individuals who want predictable and secure income stream. And of course, for those who need monetary assistance, debt instruments are also available. One of which, the easiest to obtain, is a personal loan. It establishes consumer credit, which is awarded and intended for personal use. It can either be a secured or unsecured debt.
A secured loan requires the borrower or debtor to pledge some asset like a car as collateral or security for the loan. The lender or creditor will then have rights over the pledged property once the borrower fails to pay. Usually, the creditor will take possession of the collateral to satisfy or regain the amount owed to him by the debtor. A good example is a foreclosure of a home or a repossession of a car.
There is a difference between foreclosure and repossession. Foreclosure is a legal process in which mortgaged property is liquidated to satisfy the debt of the non-paying debtor. On the other hand, repossession is a process in which the creditor, usually seller or dealer, assumes back ownership of property bought on credit. The creditor does not necessarily have to sell the repossessed property. The pledged asset will relieve the creditor of most of the risks associated with extending money to the debtor. On return, the debtor will have more chances of getting favorable lending terms such as bigger loan amount and lower interest rate.
Meanwhile, an unsecured loan is a financial resource extended by the moneylender based on the debtor’s integrity and ability to pay. Since it is granted according to the borrower’s credit rating, it is harder to obtain an unsecured loan than a secured one. A popular example of a personal unsecured loan is credit card. Also, the amount you lend to a friend is another example in which you lend money based on friendship and trust.