Secured Vs Unsecured Loan: Which Loan Should You Choose?
When applying for loans, there are two options to choose from—unsecured loans and secured loans. So, which of these personal loans should you choose?
Secured loans have collateral which can be anything valuable from a home to a car. The lender has the right to take and sell the collateral for these loans if you don’t fulfill the loan agreement. The most common types of secured loans are mortgages and car loans.
There’s no collateral in place for unsecured loans, and the lender has no right to claim your property if you default payment. Unsecured loans include personal loans, student loans, and credit cards.
Read through to get a detailed explanation of the two and some credit counseling guidelines to help you decide between unsecured loans and secured loans.
What’s a Secured Loan?
Secured loans are loans that require collateral, such as a car. The lender will hold your title deed until you pay the loan in full when applying for these loans. Things like personal property, bonds, and stocks can also back this type of loan.
The most common way to borrow huge amounts is through secured loans. Lenders only give large loan amounts with a promise to ensure repayment. Offering your home as collateral; is among the ways to ensure you’ll keep your end of the bargain.
Apart from being used for new purchases, secured loans can be home equity lines of credit or home equity loans only when guaranteed payment. And this is why most borrowers will use their homes or car as collateral.
Secured loans signify that you’re offering security to ascertain loan repayment. In other words, the lender has the right to sell your collateral if you default on the loan repayment.
Advantage of Secured Loans
- Extended repayment periods.
- Lower interest rates.
- High borrowing limits.
Examples of Secured Loans
- Home Equity Line of Credit – HELOC enables you to borrow funds with home equity as collateral.
- Recreational Vehicle Loan – This is a motor-home payment loan that covers travel trailers.
- Auto Loan – You can get this auto financing alternative through a credit union, bank, or dealer.
- Mortgage – This is a loan for home payment. Monthly mortgage payments comprise principal, interest, insurance, and taxes.
- Boat Loan – Like an auto loan, this loan has monthly payments and interest rates determined by various factors.
What Are Unsecured Loans?
Unsecured loans, the opposite of secured loans, include personal/ signature loans, student loans, and credit cards. Since these loans have no collateral, lenders take a considerable risk offering them, and that’s why they attract higher interest rates.
However, the good news is that you can seek urgent loans for bad credit through some of the best loan matching services if traditional loans turn you down.
Unsecured lenders trust borrowers can repay loans basing their judgment on the borrower’s financial resources. Besides, lenders will also use these five C’s of credit to judge your financial ability:
- Capacity – current debt and income.
- Character – comprises employment history, credit score, and references.
- Collateral – assets placed as collateral, like a car or home.
- Capital – funds in investment or savings account.
- Conditions – loan terms
The above are gauges used to analyze a borrower’s capacity to pay back the loan and can consist of the borrower’s circumstances and common economic elements.
It’s also important to remember that the five C’s of credit differ for business and personal loans.
Examples of Unsecured Loans
- Personal (Signature) Loans – These funds have a variety of uses and can range from some hundreds to thousands of dollars.
- Student Loans – These loans are used to pay college fees. You can garnish your tax returns to repay student loans even though the loan is unsecured. Student loans are available through private lenders and the department of education.
- Personal Lines of Credit – Just like a credit card, an individual line of credit comes with an authorized restriction that you spend as you wish. You can use this loan for basically anything, and interest is only charged on the amount you use.
- Credit Cards – There are various kinds of credit cards. However, standard credit cards charge once every month, and if you fail to pay the debt in full, you’ll be charged interest.
Difference Between Secured Loans and Unsecured Loans
Secured loans refer to loans that are supported with assets such as a car in the case of an automobile loan or a home when taking a mortgage. Agreeing to the loan terms means you’ll lose your asset if you default payment.
With unsecured loans, this isn’t the case; the lender can’t claim any of your possessions if you default payment.
2. Interest Rates
Unsecured loans have higher interest rates compared to secured loans. Secured loans have lower interest rates because the collateral’s risk is lower. Unsecured loans have higher interest rates resulting from higher risks associated with the loans.
3. Loan Amounts
Borrowers can take out higher loan amounts with secured loans. For instance, mortgages usually cost a million dollars or more, so borrow an amount you can afford to repay, even if you are eligible for higher loan amounts.
Unsecured loans offer less than secured loans, with a few exceptions, though. The average student loan for med school as of 2021 was $200,000.
Secured Vs. Unsecured Loan: Which Loan Should You Choose
Various elements go into assessing whether to take out an unsecured or secured loan.
Taking out a secured loan is easier as the risk is lower. However, if you’ve got a bad credit score, lenders will quite often offer you a secured loan.
Secured loans have low-interest rates, with higher borrowing limits. These are the kinds of loans you need when looking for huge amounts to quickly sort out a financial emergency.
For secured loans, you’ll need to put up an asset as collateral for secured loans, while unsecured loans will not require collateral.
However, an unsecured loan comes with higher interest rates, so you’ll end up repaying more. The question you should ask yourself is whether or not you’ll be comfortable repaying more or lose up one of your most precious assets when you default payment.
Answering these questions should help you figure out what risk you’re more comfortable with.