Banking idustry has always been associated with many types of risks. The higher the risk, the higher the price. It’s good to know that this rule applies not only to the financial market.

To better understand the specifics of collateral and unsecured loans, let’s analyse their features more closely.

So, what is a collateral loan?

In short, it is a loan that is secured by something that has monetary value and protects the lender from loss in case you fail to repay the loan. That type of loan is granted to individuals, provided that they deposit some form of security.
If the customer becomes insolvent, the bank can take off some asset and sell it to repay the debt. The market practice is that the value of the asset is higher than the loan amount.

Common types of secured loans include mortgages, vehicle loans and home equity lines of credit (HELOCs). For mortgages and HELOCs, your house serves as collateral. For vehicle loans, the one you purchase is the collateral.

In general, collateral loans pose a lower risk level for the lender; however, it implies a more extended commitment period.

Additionally, it requires stable employment conditions of the potential borrower. Needless to say, they are more complicated than simple salary loans.

Advantages of collateral loans:                                                             

+ when offering pricing conditions bank takes into account your assets (the terms may improve)
+ the same applies to the loan limit (a collateral loan results in a higher amount of money provided by banks)
+ after your mortgage repayment, you become the owner of a valuable asset and are eligible to manage it at your own discretion
+ in case you need a car or a boda boda for your business purposes, you don’t have to put some money aside to start your business

Disadvantages of collateral loans:

– the risk of losing your asset if in arrears
– a more extended period of fully paying off your instalments
– the necessity to indicate the source of permanent income
– restrictive long-term home budget management (every delay may result in being blacklisted)

A collateralised loan may be a useful tool to fulfil your dreams, especially if more capital is required to do so.

Sometimes your monthly salary and savings is simply not enough…

On the other hand…

sometimes you need only a small amount of money to push your business further or to secure your special family needs.

Then you may think of unsecured loans, which are not attached to any collateral. In such a case, your creditworthiness is the only assurance the lender has.

The common types of unsecured loans include personal loans, student loans and credit cards.

The main advantage of applying for an unsecured loan is minimum formalities from registration to disbursement.

Almost the whole process is being done by the Internet. The only thing you may be asked for is to collect a few necessary documents required by some lenders (i.e. bank statement, salary slip, etc.). Assuming you put correct data into the system during your registration, all you’ll have to do is to sign the application documents while meeting a broker.

Advantages of unsecured loans: 

+ minimum formalities (you can apply via the Internet and repay by M-Pesa)
+ shorter repayment period (including one-time repayment as well)
+ no risk of losing your assets
+ a range of offers you may compare and pick and choose from due to a cut-throat competition on the market

Disadvantages of unsecured loans:

– higher interest rates
– smaller amounts of money at your disposal
– the risk to be blacklisted by the CRB even for little overdue payments
– the necessity to repay a loan to apply for another one

Summing it up – collateralised credit products are fundamentally different than unsecured loans. Whether a secured or unsecured product is right for you depends on various factors, including your needs, of course.

Nevertheless, before making any decision, it might be useful to check your credit report and your scores as well. But most of all – it’s good to prepare yourself for more strict budget planning;) Check here

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