The Difference Between Secured and Unsecured Loans: Which is Right for You?

iQuanti: There are options when it comes to getting a personal loan. To begin with, many banks, credit unions, and online lenders offer loans to applicants with different income levels and credit scores. Lenders offer different personal loans to choose from: secured and unsecured.  

Borrowers who understand the differences between these two types of loans are better equipped to make the best decision for their financial situation. One type of loan is not superior or inferior. They both offer specific advantages that might better suit the borrower's needs at the time.

Keep reading to learn more about secured and unsecured loans and how to choose between the two.   

What is a secured loan?  

If you recently got financing for purchasing a car or truck, you took out a secured loan. The vehicle is pledged as the security to guarantee the lender that the loan will be repaid. This pledged security is also known as collateral. If you encounter these phrases during the loan application process, the lender is talking about a secured loan. Remember, the lender requires eligible collateral. Specifically, the lender may have eligibility requirements such as the age and condition of the collateral and proof of insurance. 

Vehicle loans are just one example of a secured loan. Borrowers can use precious artwork, appraised jewelry, and sometimes even parts of a stock portfolio as collateral to guarantee a secured loan. Another common example of a secured loan is a home mortgage. In this instance, the home is the collateral. If a borrower is considering a second mortgage or a home equity line of credit, i.e., a HELOC, the equity in the home is the basis for valuing the collateral.  

What is an unsecured loan? 

The chief difference between secured and unsecured loan is the need for collateral. With an unsecured loan, there is no need for collateral. The lender's approval for the loan is based on evaluating the applicant's credit score and past payment history with other credit accounts. The lender will also want the applicant to confirm income and proof of identity. 

Typical unsecured personal loan types are credit cards, student loans, and installment loans. Credit cards typically have high-interest rates on revolving balances, so it's best to pay them off quickly. Student loans and unsecured installment loans have fixed interest rates with monthly payments scheduled to be paid over a predetermined term.    

How do you choose the right loan?

Loans for new vehicles are almost always secured, so there really isn't a choice there. When purchasing a used vehicle, a consumer may prefer an unsecured personal loan and then use the cash to pay for the car. For some, that's a good strategy because by arranging to borrow more than the cost of the vehicle, there can be extra money for accessories and gas. 

Personal loans obtained for debt consolidation or to pay for emergency expenses are typically unsecured. For consumers with large amounts of credit card debt, an unsecured debt consolidation loan might be a good way to lower interest payments and get out of debt faster. While unsecured loans don't require collateral and mean less risk to the borrower, there is more risk for the lender, and that can affect the terms associated with the loan that is offered. 

Secured loans may come with more options, like offering lower payments, lower interest rates, or permitting the borrower to get enough funds to pay off the debt and still have some cash left over.  

The Bottom Line 

Whether you choose a secured or unsecured loan, deciding what works best with your personal finances and credit history is entirely up to you. Having a better understanding of the differences between the two kinds of loans will make the decision much easier. So, ask as many questions as you need to and complete thorough research before you move forward with your decision. 


Contact Information:
Keyonda Goosby
Public Relations Specialist
[email protected]
(201) 633-2125

Original Source: The Difference Between Secured and Unsecured Loans: Which is Right for You? The Difference Between Secured and Unsecured Loans: Which is Right for You?

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