You will usually have two options for personal loans which include a secured loan or an unsecured loan. An easy way to think of it is this: a secured loan uses collateral where an unsecured loan doesn’t.
But we'll give you more than that. Let's explore the difference between a secured loan vs. an unsecured loan.
In simple terms, lenders like secured loans because they’re lower risk. These loans are primarily used for larger loan amounts to be used for the purchase of a car or a house. With secured loans usually comes lower interest rates, too.
What is considered a secured loan?
- Car loans
- Real estate
- Insurance policies
A helpful reminder is that a secured loan is backed with physical property you own, otherwise known as collateral. Examples of this can include a car, home, stocks, bonds, and boats. Since collateral property is versatile and varied, many things can be used for your loan. Because this property may be seized if you do not pay your loan, secured loans are often seen as a little more risky of an option.
Some opt for secure loans as they are generally easier to qualify for and tend to have lower interest rates since they post less risks for your lender.
An unsecured loan works based on your creditworthiness, or your ability to make consistent payments. This might mean paying a bit more interest than a secured loan. Choosing an unsecured loan can also help boost credit scores.
What is considered an unsecured loan?
- Student loans
- Credit cards
- Personal loans
Unsecured loans do not need any form of collateral unlike a secured loan, however it’s important to note that if these loans are not paid on time, your debt can be sent to a collections agency and can negatively affect your credit score.
Ultimately, unsecured loans are a great option if you don’t want to offer up property (i.e. collateral) on the basis of your loan.
What Loan Type is Best?
Choosing between secured vs unsecured loans can affect your credit score, rates, need for collateral, and your approval chances. So what’s the best option for you?
The short answer – everyone is different and has different needs for their loans. The biggest difference between these two is the need for collateral assets. While secured loans give the lender the permission to seize assets, the unsecured loan does not.
However, interest rates with unsecured loans are typically higher than those with secured loans. It all depends on factors like your credit score and your ability to make payments. Keep in mind that secured loans have a higher borrowing limit, meaning there’s more money you’re able to borrow from other people, firms, or banks.
Choosing between a secured and an unsecured loan can feel a little muddled, but it really comes down to individual needs. It is possible to get a secured loan if you have poor credit. If you’re not willing to give access to your assets, an unsecured loan may be best. If you’re still unsure which direction to lean, you can always chat with World to learn more.