By Debbie Gregory.

When looking for financing to buy a car, make repairs to your home or for your business, you may have the option of either a secured or unsecured loan. It’s important to know the differences between these two types of loans.

A secured loan is one that is backed by an asset or collateral. Common examples of secured loans are mortgages or auto loans. When the borrower agrees to the loan, they are also agreeing that the lender can repossess that asset if the borrower defaults on the loan.

Conversely, an unsecured loan is not backed by an underlying asset. Unsecured debt includes credit card debt, medical bills, utility bills and other types of loans or credit that were extended without a collateral requirement. This type of debt presents a high risk for lenders since they may have to sue for repayment if the borrower doesn’t repay the full amount owed.

Secured loans are the most common way to get large amounts of money. A lender is only going to loan a large sum with promise that it will be repaid. Putting your home on the line is a way to make sure you will do all you can to repay the loan. Secured loans usually have lower interest rates because they are less risky since they are backed by an asset.

Additionally, the borrower may not need to have a lengthy or perfect credit history if the loan is backed by an asset. Another advantage of a secured loan is that usually they have longer terms than an unsecured loan.

So what are the downsides to a secured loan? Secured loans often require a lengthy application process with a lot of documentation and paperwork up front, and if you default, your credit report may be dinged twice: once for the actual late payments and a second time for the foreclosure or repossession.   You are also at risk of losing your collateral.

Applying for an unsecured loan is usually much easier than applying for a secured loan, with less paperwork and documentation. An unsecured loan is based on the borrower’s creditworthiness, so if a borrower defaults, creditors can take legal actions against the borrower, put the account in collections, and report the account to credit agencies.

Secured loans usually have a very set repayment schedule, while unsecured loans give you more options.