Main advantages of secured and unsecured loans

Choosing a loan is an important decision when you urgently need money. As you know, each type of loan has its own advantages and disadvantages, which are worth paying attention to before applying. Many people cannot decide which loan to choose - secured or unsecured. Understanding the differences between these types of loans leads to financial literacy, which can have a positive impact on your life.

Secured and unsecured loans have different interest rates, repayment terms and borrowing limits. Thus, study the information about these types of loans, their pros and cons, and decide which one is best for you.

How do secured and unsecured loans work?

Secured Loans

A secured loan is a type of loan that you can obtain by providing collateral to the lender, so they are protected by an asset. What can be used as collateral? Typically, the item purchased, such as a home or a car, can be your security. Thus, until you pay off the loan in full, the lender will hold the deed or title. Moreover, in addition to vehicles or a house, you can use other items such as personal property or bonds as collateral.

Generally, a secured loan is the most common way to get a large amount of money. Of course, the lender who provides you with the loan wants to be sure that you can return it on time, and if the loan is secured by collateral, then the lender has guaranteed that in case of non-payment, he will sell your property and receive the money that he borrowed to you.

How to qualify for secured loans?

Of course, secured loans are easier to obtain than unsecured ones due to the fact that the lender has a guarantee of repayment of his funds. This way, you don't have to meet a lot of criteria to prove that you can repay the loan. When approving an application, the lender takes into account your credit rating, history, income, savings account, and so on.

Secured Loan Interest rates

As a rule, secured loans have better interest rates than unsecured ones. Interest rates also depend on the factors listed above. The value of your collateral can also affect your interest rate.

Secured Loan Payment terms

The repayment terms of a secured loan may vary. Typically, you have to repay the loan in regular monthly installments over several years, depending on the loan amount. It is important to be aware that some secured loans have variable rates, so your monthly payments may vary.

Risks

Secured loans are always risky as they involve collateral. Thus, if you regularly miss payments, you will receive a non-payment penalty. Moreover, your credit will suffer. Even one missed payment can drop your credit score by 100 points. Also the lender will be able to seize the collateral. In some cases, the lender will be able to sell your collateral without notifying you about it. Thus, a secured type of loan is much risky than an unsecured one.

Where can I get a secured loan?

At the moment, the most convenient way to get a secured loan is through online application. Thus, you need to find an online lender that will meet your expectations and apply. The entire loan procedure can be done online also. Moreover, you can get a secured loan from a bank and credit union.

Examples of secured loans

  • A mortgage is the best known secured loan option that is used to pay for a home. When choosing this loan, you will pay a loan, interest, insurance and taxes on a monthly basis.
  • Home Equity Line of Credit allows you to borrow money using your home's equity as collateral.
  • Auto Title Loan is also a popular type of financing that allows you to use your car as collateral for your loan. As a rule, you can use any vehicle as collateral for the loan, however the loan amount will depend on the value of the car.

What's Collateral and What Can You Use?

In simple terms, collateral refers to assets that you offer to the lender as a guarantee in case you default on your loan. If the loan isn't repaid, the lender has the right to seize this asset.

Two examples of items that could be used as collateral for a secured loan include:

  1. Real Estate. This can be a home, land, or any other real estate property. The most common type of secured loan using real estate as collateral is a mortgage.
  2. Vehicles. Cars, trucks, motorcycles, or even boats can be used as collateral. Auto title loans, for instance, allow you to use your vehicle title as collateral while retaining the use of the vehicle.

With collateral, lenders feel safer giving out bigger loans or offering better interest rates because they have a way to get their money back if something goes wrong.

Unsecured Loans

An unsecured loan is the opposite of a secured one, which means that you do not need to provide collateral in order to be approved and receive the necessary funding. Unsecured loans include student loans, personal loans, credit cards and so on. By providing this loan to borrowers, the lender assumes some risk as there is no asset to cover the loan amount in case of non-payment of the loan. Thus, the presence of risk is the reason for higher interest rates. If you cannot get an unsecured loan, you can go to another lender and get a secured one, as you do not need to meet a lot of requirements for this.

Since this type of loan is risky for the lender, he will evaluate you according to some criteria in order to decide whether to give you a loan or not. Typically, lenders take into account things like credit rating, credit history, income, current debt, money in savings or investment accounts, and personal assets. This information will help the lender understand if you can pay the loan debt on time.

How to qualify for unsecured loans?

In order to obtain an unsecured loan, you must have a good credit score. Thus, borrowers with a FICO score of 690 or higher have a good chance of not only be approved, but also getting favorable interest rates. Also, in order to be approved, you will have to go through credit checks. Moreover, some lenders are considering alternative data in order to approve your application or deny you a loan.

Unsecured Loan Interest rates

As already mentioned, due to the fact that you do not provide collateral to the lender, the interest rates on this loan will be higher. Typically, unsecured loans have fixed interest rates that can vary. As a rule, you can get 6 to 36 percent. In order to receive the most favorable interest rates, you must not only be a qualified borrower, but also have an excellent credit history. People with fair or bad credit scores will receive the least favorable rates.

Unsecured Loan Payment terms

The repayment terms of unsecured loans also vary, however, they are paid in regular, fixed monthly installments. Payment terms can be from 2 to 7 years.

Risks

An unsecured loan is less risky than a secured one. Since you do not provide collateral, you cannot lose anything if you miss payments. However, your credit will suffer. Moreover, most likely you will have to pay a penalty for missed payments, which will negatively affect your financial situation. It is also worth knowing that in case of non-payment of the debt, the collections agency can take you to court.

Where can I get an unsecured loan?

As with secured loans, the most convenient way to get a loan is online lending. You can also contact the bank, but it is worth knowing that not all banks offer unsecured loans. Therefore, do your research before applying.

Examples of unsecured loans

  • A personal loan is a type of loan that you can use to cover your personal needs. Typically, you can spend the loan on just about anything you need.
  • Credit cards are also classified as unsecured lending. Typically, when using credit cards bill once a month, and also charge interest if you do not pay the balance in full.
  • Personal Lines of Credit is a lot like a credit card. The line has an approved limit that you can use. You can also spend money on any need, and you are charged interest on the amount you spend.

Advantages and disadvantages of secured vs unsecured loans

After learning the basic information about secured and unsecured loans, it is important to pay attention to their strengths and weaknesses. This will help you make the right choices and get the funding you need.

What are the advantages of secured loans?

Pros of a secured loan
  • Interest rates. As stated earlier, since the loan is secured, the lender has some kind of guarantee that you can pay the loan on time. Thus, the interest rates for this type of loan are lower than if you apply for an unsecured loan.
  • Borrowing Limit. Providing collateral also gives you the ability to qualify for a larger loan amount. Thus, if you need a large one and do not want to overpay a lot in interest, a secured loan is a good option.
  • Payment terms. Typically, a secured loan has a longer repayment terms than an unsecured one. This gives you more time to pay off the debt.
Cons of a secured loan
  • The main disadvantage of this loan offer is the risk of losing your collateral. That is why it is important to assess your strengths before submitting an application, as well as to have a loan repayment plan in order not to miss payments.
  • Also note that sometimes interest rates can vary, which can lead to larger monthly payments than you expected.
 

What are the advantages of unsecured loans?

Pros of an unsecured loan
  • Fixed interest rates. If you received an unsecured loan, you do not need to think about how much you owe this month, since you know your fixed interest rate. It helps you plan your budget and payments better.
  • No risk. Since you do not provide collateral to the lender, you do not run the risk of losing it if you fail to pay.
 
Cons of an unsecured loan
  • The interest rates on an unsecured loan are generally higher than on a secured one because you cannot provide the lender with a guarantee that you will be able to repay the loan.
  • Also note that in order to get an unsecured loan, you need to meet a lot of eligibility criteria. Thus, make sure you are eligible to apply before doing so. However, if you have a source of income and a good credit rating, obtaining this type of loan will not be a problem.
 

Should you get a secured or unsecured personal loan?

Do you still have doubts? Study the information below and then make a decision and apply for a loan that is right for you.

  • If you are a reliable borrower with a good credit history and high income, and have a debt-to-income ratio below 50%, consider the option of an unsecured loan. Many lenders offer prequalification in order to find out what terms and interest rates you can get. There is no need to worry as the prequalification process does not affect your credit. Thus, having studied the offers from different lenders, you can choose the most profitable for you.
  • If you have a low credit rating and a high debt-to-income ratio, then a secured loan may be a good option for you. This way, you can get longer repayment terms and lower interest rates. This way, monthly payments will not affect your budget that much and you will be able to repay the loan comfortably.
  • Of course, it is worth remembering that with an unsecured type of loan, you will be able to get a lower amount than if you apply for a secured loan. Thus, if you need a large amount, then it is worth considering a secured loan in order to get it. However, if you need money to cover basic needs such as car repairs or paying bills, an unsecured loan may be sufficient. Also remember that with a secured type of loan, you risk losing your collateral if you do not make timely payments.

It does not matter which loan you choose, it is important how you will use the money received and pay off the debt. Before you apply, make sure you can repay the loan with interest, and pay attention to the fees and commissions. Always have a repayment plan in order not to miss payments or worsen your credit history.