According to reports, about 83.5 million took out personal loans in the last twelve months. However, very few people know the difference between secured and unsecured loans.
In this article, we’ll explain you the difference between the two and also answer questions you may have.
Let’s get started:
What Are Secured Loans?
Secured loans are loans that require some kind of security, which is known as collateral. The security can be an asset, such as property in the case of a mortgage or a vehicle when you apply for an auto loan.
Your collateral serves as a guarantee that you will pay the loan back on time. When you opt for a secured loan, you give the lender the right to sell your asset and get their share. However, the asset will remain in your custody until you default.
This is why the value of the asset has to be higher or at least equal to the value of the loan.
In case, the asset loses its value due to changes in the market price or other such reasons, you will have to pay the difference if the lender has to sell the asset to recover the amount.
What Are Unsecured Loans?
Non secured personal loans are loans where the lender does not ask for any form of security, hence there is no collateral involved.
There is no risk of lenders seizing your assets in case of unsecured loans. Some of the best examples of unsecured loans are student loans and personal loans.
Since there are no guarantees when it comes to unsecured loans, lenders will judge your application based on your credit score and earning potential.
Your loan application will get approved if you have a decent score and the ability to make payments.
Unsecured loans are very popular but they’re usually smaller since the lender does not have collateral to fall back on in case you fail to make payments.
Secured Loans vs Unsecured Loans: Pros and Cons
Both personal secured and non secured personal loans come with their own pros and cons. Here’s a table to help you understand the difference:
|Secured Loans||Unsecured Loans|
|1. Easy to get even if you have a low credit score since lenders do not pay much attention to your financial history when judging applications.||1. Can be hard to get if you do not have a good credit score – above 600 in most cases – as lenders mainly only use your credit score when judging applications.|
|2. The loan amount can be in the millions, depending on the worth of collateral. The more valuable the collateral, the bigger will be the loan.||2. The amount is not much as there is no guarantee that you will pay the loan back on time. Hence, lenders are often a little apprehensive.|
|3. The interest rate rarely depends on your credit score.||3. The interest rate largely depends on your credit score.|
|4. You will lose your assets (collateral) if you do not pay the loan on time.||4. There is no risk of losing any of your assets since there are no securities involved in unsecured loans. However, the lender may sue you if you fail to clear the debt.|
|5. The interest rates are typically low in case of secured loans.||5. The interest rates are typically high in case of unsecured loans.|
|6. Examples: car loans, housing loans||6. Examples: personal loans, credit cards|
Which Loan Impacts My Credit Score?
Technically speaking, both loans will have an impact on your credit score. In fact, the impact is pretty much the same in both cases.
If you pay your loan in a timely manner, your credit score will improve. Similarly, if you are late on payments, your credit score will suffer.
However, a lot of borrowers use secured loans to improve credit history and build credit score.
Secured or Unsecured Loan: Which One Should I Go For?
There is no one answer to this question. Banks and financial organizations would want you to opt for a secured loan as it offers them security. They’d be safe in case you fail to make payments.
On the other hand, unsecured loans are preferred by users because they do not involve guarantees or collateral. However, they are harder to get, especially when you have a low credit score.
Hence, the right one will depend on your overall financial condition. If you need a lot of money then a secured loan would be the best choice because the amount of loan will depend on the market value of the collateral you intend to lien.
However, choose a secured loan only if you are 100% sure about your ability to clear it in the future as not doing so may cause you to lose your asset. But, the risk may be worth it since secured loans are cheaper than unsecured loans.
So, consider your situation and then choose the right one.
Pay Attention to the Lender As Well
Whether you opt for a secured loan or an unsecured loan, it is important to work with a reliable financial organization.
When it comes to secured loans, different lenders have different terms. Some are also more lenient and may be willing to change terms if you face difficulties in paying the amount back.
Similarly, when it comes to unsecured loans, different lenders offer different interest rates and terms and conditions. Plus, some may be willing to work with individuals with low credit scores. So, search the market and find a lender that suits your requirements.
Changing One Loan Type Into Another
It may be possible to change a secured loan into an unsecured loan but only under certain conditions. Also, your lender may offer to change your unsecured loan into a secured loan if you miss payments. However, they’ll need your consent before doing so. While it may sound like a bad deal, some borrowers opt for this option to avoid getting sued.
Who Offers Secured and Unsecured Loans
Banks and credit unions offer secured loans. Some of the most popular options include:
- Wells Fargo
- TD Bank
- PNC Bank
- BB&T Bank
- Fifth Third Bank
- BMO Harris
On the other hand, a large number of providers, including online lenders offer unsecured loans. However, since scams are also common, make sure to only work with a licensed provider.
Both secured and non secured personal loans can be useful in different situations. Get the right financial guidance and opt for a loan only when you’re sure you’d be able to pay it back.