Which Describes The Difference Between Secured And Unsecured Credit?
Question: Which Describes The Difference Between Secured And Unsecured Credit?
Answer: Secured credit is backed by an asset equal to the value of a loan, while unsecured credit is not guaranteed by a material object.
Secured and unsecured credits have many differences in the question visible above. The first option here is the right answer, as it describes the proper difference between these two types of credits. However, I will suggest you read this article to get a detailed answer to your question.
We need to get into a detailed description of both secured and unsecured credit before truly understanding the difference.so I have described both types of credits and offered a detailed difference between secured and unsecured credits. Here are the definitions of both of these credits so that you can understand them clearly.
What Is Secured Credit?
Secured loans have collateral to back them up. The most common types/ examples of secured loans are – mortgages and car loans. For these loans, your home and car are the collaterals. But aside from them, your collateral can be anything.
Any item or asset holding financial value can be your collateral to back up your secured credit or secured loan. The worst-case scenario is – if you don’t pay your loan back, the bank has the right to seize your collateral asset to compensate for your payment.
Once you avail of a secured loan, the lender/bank can put a lien on your asset. When you will pay your loan off the lender can get back to owning it.
If you are looking for collateral assets, then here are some examples you need to check –
- Real estate
- Bank accounts (savings accounts, checking accounts, CDs, and money market accounts)
- Vehicles (cars, motorcycles, trucks, boats, SUVs, etc.)
- mutual funds, Stocks, or bond investments
- Insurance policies (including life insurance)
- High-end collectible items and other valuables (antiques, precious metals, etc.)
What Is Unsecured Credit?
Unsecured credits are loans where you don’t need to collaterals back your credit up. Your credit cards, personal loans, and student loans come under this type of loan. When financial institutions issue these loans, they check your credit score and history of paying off your debt before giving you credits.
You can have these loans for any reason, like paying for your wedding, repairing your bathroom, or paying the debt. These loans have lower APR than credit cards and for that matter, you can also save cash on interest.
The first option is true, while the rest of them are not.
- The second option is wrong because it describes the complete opposite of what both secured and unsecured credit stand for.
- The third option is wrong as well. Bank can seize your asset if you have secured credit. However, it cannot do the same for an unsecured credit card.
- Lenders can seize the property in secured credit. But the option here says the opposite. Hence it is wrong as well.
Secured Credit Vs Unsecured Credit
Which describes the difference between secured and unsecured credit? The answer to this question is already available in the first paragraph. However, you have gotten a better understanding of it by reading the definitions of each of the loans. Here is a better explanation of the same.
The main and only difference between these types of credits is – that the first one requires borrowers to have collateral assets to back up their loans. On the other hand, the second one, unsecured credit, does not require you to have any collateral against your loans.
Frequently Asked Questions (FAQs):
Here are some popularly asked questions regarding the same topic. You may read them if you need more solutions –
Ans: If you are worried about your credit scores, you don’t have to think about what type of credit you have. But, secured credit cards are more famous due to building credits and assets. In comparison to secured credits, unsecured ones are no way less. Your card fees, interest rates, and type of credit card don’t affect your credit score.
Ans: Your deposits start from $200, and they may rise up to $2,500. The simple answer is that the amount you deposit will become your credit limit. If you deposit $700, you will have a credit limit of $700.
Ans: Yes, you can get your deposit back from a secured credit card. When you have increased your credit score using your credit card, you can close it and get your deposit back. But you should also be aware of the risk.
Final Verdict
Secured credit is backed up by an asset from the borrower. A borrower gets an equal amount of money for the asset they keep as collateral. According to this fact, the answer to your question would be the first option.
I think you got your answer. If you have any other queries, you can put them in the comment box. We will try to get back to you as soon as possible.
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