When you are looking to borrow money, there are two key things to be aware of.
First, there are two types of loans: secured and unsecured loans.
Second, although there are many options out there to choose from, we hope to clear up any confusion surrounding secured and unsecured loans so you can decide which kind of loan is best for you.
An unsecured loan is a loan that does not require you to put up items you own, such as your car or home, as collateral to qualify for the loan. Instead, an unsecured loan is issued based on the borrower’s creditworthiness and ability to pay.
Creditworthiness is a term used in the loan world. Basically, it means the collection of factors a lender takes a look at to determine the likelihood that a borrower will default on his/her loan. Typically, your creditworthiness takes factors like your credit score and income into account.
For an unsecured loan, the lender is taking on a bigger risk by giving money to the borrower without collateral.
Personal loans are generally unsecured loans.
Personal loans: You can apply for a personal loan from a bank, credit union or online lender. Depending on the terms, you can use a personal loan for a variety of purposes, such as paying for a home renovation or consolidating credit card debt.
A secured loan requires you to put up items you own, such as your car or home, to qualify for the loan. These assets, known as collateral, can be seized by your lender if you default on your loan. Collateral provides protection to a lender because, in the event that you fail to pay back the loan, the lender may collect and sell the collateral used to secure the loan.
Yes, they actually have the right to do that.
If you default on a secured loan, the lender has the right to collect the collateral and sell it, and the sale’s proceeds are used to pay off your outstanding balance. If your outstanding balance is higher than the amount received from the sale of your collateral, then the lender can take legal action against you to collect the amount of your loan that is still unpaid.
Losing your home or other possessions is typically not something anyone wants to happen to them.
Auto loans: These loans can be used to buy a vehicle, with the purchased vehicle serving as collateral for the loan. If you fail to pay back the loan, the lender has the right to take back the car, which, if you’re someone with an hour-long commute, isn’t a good thing.
Mortgages: Mortgages are loans used to make a real estate purchase in which the loan is secured by the property you are buying. If you fail to pay back the loan, you could lose your property to the lender.
Though they are both options for borrowing money, secured loans and unsecured loans each have their pros and cons.
One of the major differences between the two loan types is what happens if you fail to make your payments. If you stop paying a secured loan, the lender has the right to seize the collateral that you used to secure the loan. For an unsecured loan, the lender does not have access to any collateral, so in the event of a default a lender’s options to collect the sums owed to it are more limited.
No matter what kind of loan you choose, you’ll end up having to pay interest. For an unsecured personal loan for example, your interest rate is determined by numerous factors, including how good your credit score is. If you have good credit (a score of 660+), you could qualify for a lower interest rate.
There is a lot to consider when deciding between a secured personal loan and an unsecured personal loan.
If you’re someone with not-so-hot credit or you’re trying to rebuild your credit and don’t qualify for an unsecured personal loan, a secured personal loan may be a decent option for you, since it is easier to qualify for—so long as you have something to secure the loan with.
But if you are worried about putting up an asset as collateral to be approved for a secured personal loan, an unsecured loan could be a better option, since it’s less risky.
Personal loans generally have fixed payments, which means consolidating debt or financing a wedding could be easier since you’re able to budget your payments better compared with credit cards.
At the end of the day, whichever loan you need depends on your unique situation. Do your research and make sure that you’re comfortable with your options. Once you’ve decided which type of loan is best for you, head on over to that lender and apply.