People often confuse secured and unsecured loans. The main difference between secured and unsecured loans is collateral. This means secured loans must be backed up by collateral from the borrower, while unsecured loans do not. This affects the repayment terms, rates of interest, and borrowing limit. There are advantages and disadvantages to choosing both secured and unsecured loans. To understand them, let’s look at the differences in detail:
As mentioned, secured loans are protected by an asset that’s put against the lent money. The asset could be a house, car, bonds, stocks, or other personal property. The lender holds the title or deed until the money is repaid. Should the borrower fail to repay the lender, they take ownership of the collateral to cover the loan.
Collateral takes your loan application a little further if you don’t have a good credit score; however, you risk losing your collateral if you fail the repayment. Since secured loans reduce the risk for lenders, they are easier to qualify for. The lender assesses your credit history, income, and debts, and adding collateral to your loan application will make it significantly stronger. Secondly, secured loans have a lower rate of interest than unsecured loans. This is because collateral strengthens your application.
The biggest risk for borrowers regarding secured loans is neglectfulness in the repayment terms. If they miss paying the loan back on time, the lender will seize the collateral, and the borrower’s credit score will suffer immensely. Even a single missed payment can affect a credit score by as much as 100 points. Sometimes, the lenders are entitled to seize the collateral after only a few missed payments.
Unlike secured loans, unsecured loans don’t require collateral, so the loan application is approved solely based on your credit history, income, and debt. Since the loan isn’t secured by an asset, borrowers may end up paying more interest, but at least they don’t risk losing their asset.
Unsecured loans are assessed based on the borrower’s capability to repay the loan. Usually, lenders check the debt-to-income ratio and the credit history to make that decision. Some lenders also check alternative data like education history as well. The rates for unsecured loans are typically higher. People with better creditworthiness will get a better interest rate than those with less favorable credit.
One can repay unsecured loans in fixed monthly installments based on the repayment terms, which may be set for a particular period of time. The credit score will suffer if one doesn’t pay the installment on time. However, some lenders may reduce the interest rate, lower the monthly payments or put you on a hardship plan if you cannot pay your monthly installment. Unsecured loans include instant loans, payday loans, and online personal loans.
Understanding The Best Kind of Loan For You
There are certain things to consider while deciding whether to go for a secured or unsecured loan. Your choice will depend on your affordability, needs, and personal preference. Here are a couple of things that will help you make that decision:
- Your ability to offer collateral: If you’re looking to get a bigger loan and you have assets like property or land, then you can go for a secured loan, as you will get a lower interest rate. On the other hand, if you don’t have assets, go for an unsecured loan to get the funding immediately.
- The loan amount: There are many online personal loan lenders who can give you instant approvals if the loan amount is small. There are car-title loans, same-day loans, instant loans, and payday loans. One of the biggest advantages of getting such loans is that you don’t have restrictions on the end use of money, and you can get them approved from the comfort of your house. If the amount you need is quite large, then you must go with secured loans, as you won’t be eligible for instant personal loans.
- The time period within which you need the loan amount: As mentioned above, unsecured loans don’t need collateral. Thus, they’re assessed and approved quickly within a matter of hours. This makes unsecured loans suitable for borrowers who need instant funding. On the other hand, if you need money for a planned expense and you can wait for a couple of days, then you may go for a secured loan.
Whatever kind of loan you choose, remember that it must meet your requirements and that you must be able to offer collateral or pay a higher interest rate. As seen above, both secured and unsecured loans have advantages and disadvantages. So, it completely depends on the individual to decide what they need and how that aligns with their long-term financial goals.