Unsecured vs. Secured Loan

One day, at the bank, this long time depositor came in and asked to see a bank officer. " I would like to know the difference between a unsecured and a secured loan."

The bank officer promptly pulls out a detailed binder listing rates and loan terms. " On an unsecured loan, we are lending money based on your credit history and amount of funds deposited. The current rate is 10% per annum."

"For a secured loan, we would have to hold some tangible asset as collateral. Our current rate is 8% per annum."

So the client thinks about a few minutes, and say " I would like to have a $10,000 secured loan. I will need the funds for only 6 months"

The bank officer then starts filling out the necessary chattel mortgage papers. "What type of asset are you pledging? Your apartment building, your home, or your CD's"

The clients replies, " I have a brand new 1996 Ferrari that is completely paid for. The pink slip is in my wallet. In fact, I will give you the pink slip and all the keys."

The bank officer quickly inspects the car and signs all the promissory note agreement with the client. He then accepts the car and pink slip.

Exactly six months later, the client comes back. He writes out a check for $10,800 which includes principal and six months interest.

The Bank Officer looks at the client and asks, ' I check with our records, and you have a long time customer for ten years. In fact you have over $200,000 in various CD's and Money Market funds. You did not have to borrow money from us"

The customer replied, " I went to Asia for a six month vacation. You were the cheapest way to store my car"