How Do Secured and Unsecured Personal Loans Differ?
When it comes to taking out a loan, there are two main options and you may have difficulties picking between- a secured personal loan and vs. an unsecured personal loan. But what’s the difference between them? And more importantly, which one is right for you?
Here we will cover the basics of both unsecured personal loans vs secured from what they are, how they work, and more. So, whether you’re looking to finance a big purchase or consolidate debt, understanding the features of each type of loan will help you make an informed decision that best fits your financial needs.
In a nutshell, secured vs unsecured personal loans are those that are backed by collateral, typically in the form of a home, car, or another valuable asset. These loans tend to have lower interest rates because the lender has less risk if the borrower defaults. However, in case that does happen the borrower could lose their collateral.
On the other hand, unsecured loans are not backed by any collateral and thus tend to have higher interest rates. Additionally, there is also less risk for the borrower as they will not lose any property if they default on the loan.
What is a Secured Personal Loan?
As we already briefly mentioned, personal loans are secured or unsecured. And the difference between an unsecured and secured personal loan is the fact that if you were to choose a secured type you will need to provide collateral.
Because of this security personal loans have lower interest rates than unsecured loans as they pose less of a risk to the lender.
The most common type of collateral for a secured loan is a vehicle, such as a car or a motorcycle. The value of the collateral must be equal to or greater than the amount of money being borrowed. For example, if you want to borrow $10,000, you would need to put up a vehicle worth at least that much as collateral. If you default on the loan, the lender can repossess your vehicle and sell it in order to get their money back.
Another common type of collateral for a secured personal loan is a home equity line of credit (HELOC). A HELOC allows homeowners to borrow against the equity in their homes. The value of your home equity serves as collateral for the loan. If you default on the loan, the lender can foreclose on your home and sell it.
Secured Personal Loan Advantages
There are a few key advantages to secured personal loans vs unsecured ones that borrowers should be aware of. First, because the loan is backed by collateral, lenders may be more willing to approve a loan request. Second, borrowers will be able to get a lower interest rate on a secured loan than on an unsecured loan. Finally, a borrower may have the option to borrow a larger amount of money with this loan type.
For borrowers who are looking to finance a major purchase or consolidate debt, a secured personal loan may be a good option to consider.
Secured Personal Loan Disadvantages
In case you’re thinking about taking out a secured personal loan, it’s important to be aware of the potential drawbacks as well. Here are some things to keep in mind:
If you default on your loan, the lender can seize the asset you used as collateral. This can result in a loss of money or property, which may be difficult to recover from. And you may need to provide additional collateral if you want to borrow a large amount of money.
And lastly, it can be difficult to get approved for a secured loan if you have bad credit even though you have collateral. This is because lenders view you as a higher-risk borrower and may require extra security measures before approving your loan.
What is an Unsecured Personal Loan?
An unsecured personal loan vs a secured one does not require collateral. Collateral is an asset that the borrower pledges to the lender in order to secure the loan so many people turn to unsecured loans to avoid the risk of losing a certain asset.
Nonetheless, unsecured personal loans are much riskier for lenders because they have nothing to fall back on if the borrower defaults. As a result of this, they typically charge higher interest rates than on secured loans. Additionally, there is less negotiating room for a borrower and there may be higher credit score requirements so the lender can offset some potential risks.
Unsecured Personal Loan Advantages
There are several advantages to unsecured personal loans as opposed to secured loans. One advantage is that the borrower does not have to put up any collateral in order to qualify for the loan. This can be a benefit for people who do not own any property or have any equity in their homes.
Another advantage of an unsecured loan is that it may be easier to qualify for than a secured loan if you have good credit. The approval process may be faster as well since the lender does not have to appraise the value of the collateral.
Unsecured Personal Loan Disadvantages
Now let’s take a look at some of the drawbacks these loans have. First, unsecured personal loans have much higher interest rates than secured personal loans.
Another disadvantage of unsecured loans is that they often come with shorter repayment terms. This means that borrowers will have less time to pay back the loan, which can make it difficult to manage if they have other financial obligations. Also, this will make your monthly payment higher.
And lastly, unsecured personal loans may have strict penalties for missed or late payments, so it’s important to stay on top of your installments.
Interest Rates for Secured vs. Unsecured Personal Loans
When you’re considering a personal loan, one of the first things you’ll need to decide is whether you want an unsecured versus a secured loan. Both have their own set of benefits and drawbacks we thoroughly covered so be sure to compare them.
A secured loan is always seen as less of a risky path for a lender so if you have good credit, you can expect rates between 3% and 6%. However, if you have poor credit, you may have rates as high as 25% even though you are willing to provide collateral. Due to these variations, it is highly important to shop around for the best loan deal.
An unsecured loan is not backed by any collateral, which means that if you default on the loan the lender will have greater difficulties recouping their losses. As a result of this, they will set much higher interest rates. So, if you were to choose this loan type even if your score is near perfect you will have at least a 7% interest rate to pay. And if your credit score is much lower, this rate can go up to 36%.
So, which type of loan is right for you? It really depends on your individual circumstances. If you have good credit and a steady income, you may be able to qualify for an unsecured loan with competitive interest rates. However, if you have bad credit or are self-employed, a secured loan may be your best option for getting a good deal.
Which Is Better for Personal Loans: Secured or Unsecured?
The answer to the question of which is better for personal loans, secured or unsecured, depends on the individual borrower’s unique circumstances. The decision should be based on many factors, including credit history, income level, financial goals, and ability to obtain collateral. Borrowers should carefully consider all of these factors before applying for this type of financing.
Secured personal loans will offer lower interest rates and bigger amounts you can borrow so if that is something you are looking for, we suggest you further explore this loan type.
On the other hand, if you don’t mind higher monthly payments or just don’t want the risk of the lender taking your collateral, the unsecured personal loan may be the way to go.
Conclusion
Personal loans are quite a popular solution and in this article, we tried to give you a good explanation of what is a secured personal loan vs an unsecured one.
They both have their own set of advantages and drawbacks but deciding which type is best for you depends not only on these factors but on your individual financial situation, credit score, and what kind of security you are willing to put up as well.
Before applying for any type of loan, make sure that you do thorough research so that you can find the best loan possible for your needs. Whether it is a secured or an unsecured personal loan, understanding all the details will help to ensure a successful outcome in the end.
