What’s The Difference Between A Secured And Unsecured Loan?
If you’re thinking about applying for a personal loan to cover some expenses, you may run into terms like secured and unsecured loans. What’s the difference between the two? Find out now.
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Secured Personal Loans
This type of personal loan is secured or backed by collateral. What is collateral? It’s something you own that you offer the lender in exchange for the loan. Should you fail to repay what you borrow, the lender can take the collateral to recover some of the payment. Here are three examples of common loans that are secured and backed by collateral:
- Automobile loan – Backed by your car.
- Mortgage (home loan) – Backed by your house.
- Home equity line of credit – Backed by your house.
What property can you pledge with a secured personal loan? That depends on the lender, as some do not accept or offer secured loans. If they accept collateral, however, typical property used in such situations includes a certificate of deposit, a savings account, or a car.
Why might you choose a secured personal loan versus an unsecured one? If you’re having trouble qualifying for a personal loan because your credit score is low or you lack other factors that make a lender willing to work with you. Luckily, some personal loan lenders do not have minimum credit score requirements, so you may not run into this issue.
As for the benefits of secured loans, the first is that they can be easier to get since you are putting up collateral that lowers the lender’s risk. By knowing they can repossess your property, the lender may be willing to say yes to a loan versus if no collateral was involved.
Another benefit of secured loans is they may offer lower interest rates. Once again, this is due to lower risk and collateral being involved. And beyond lower interest rates, secured personal loans may also come in larger amounts, letting you borrow more cash since you are putting up collateral.
While secured loans carry many benefits, they also have a significant downside: Fail to pay the money back, and you could lose your property. For this reason, you should avoid secured personal loans if you think you may have trouble with repayment.
Unsecured Personal Loans
Many personal loans are unsecured, meaning they are not backed by collateral. This results in more risk for the lender because if you cannot repay the cash you borrow, they will be stuck holding the bill with no collateral to claim.
The lack of collateral with unsecured personal loans means lenders will take a closer look at your credit score, employment, etc., before making a lending decision. As such, unsecured loans are often harder to qualify for. Due to the added risk of no collateral, unsecured loans usually carry higher interest rates and come in lower amounts.
While you won’t lose any property if you fail to repay an unsecured loan, you will probably take a massive hit to your credit. The lender may also put your account in collections and sue you. Get a judgment against you, and your wages could be garnished.