Key Differences between Secured and Unsecured Loans

In this article, we’ll look at the difference between secured vs. unsecured loan and what you should consider when choosing between them.

Table of Content

What is the Difference Between a Secured and Unsecured Loan?
How Do Unsecured Loans Work?
Types of Unsecured Loans
Should You Get a Secured or Unsecured Personal Loan?
How Do Secured Loans Work?
Types of Secured Loans

What is the Difference Between a Secured and Unsecured Loan?

Gathering all the needed information can be confusing when you make financial decisions about a secured or unsecured cash loan. That’s why we created this list of the main differences:

• Collateral

  A secured loan is one where you use something as collateral to ensure that the lender gets paid back if you don’t repay the loan.

  An unsecured loan does not require collateral. Instead, it relies on your credit history and ability to make the monthly payment.

• Interest rates

  An unsecured debt typically has higher interest rates than it would be on a secured loan. It is because when you take out a secured loan, you are putting up collateral against the loan in case you don’t pay back the debt. Plus, the higher APR is linked to the risk taken by lenders while lending you money.

• Borrowing limits

  Secured loans typically have higher borrowing limits. They allow consumers to get up to 100% of their collateral value. So, if you have $100,000 worth of personal property as collateral, you can obtain up to this maximum sum against it.

  Unsecured loans have as much flexibility regarding borrowing limits. However, in most cases, unsecured loans only allow bad credit borrowers to borrow up to 30% or less of their annual income.

• Money Usability

  Secure loans are a great way to get your money at a reasonable rate. Secured loans are typically used for large purchases and debt consolidation.

  Unsecured loans don’t require collateral, so you can use the money for everything you want, from minor medical bills to car repairs.

• Eligibility Requirements

  The requirements for obtaining a loan vary depending on which lender you are applying for, but these basic criteria apply to all people who need secured or unsecured loans:

  • Be 18 years old or older;
  • Have a valid Social Security number to complete an application;
  • Have proof of income from your current employer or previous employers if you make less than $20,000 per year;
  • Valid bank account.

How Do Unsecured Loans Work?

Here are the steps for getting and repaying the unsecured loans:

Types of Unsecured Loans

We’ve compelled a short list of the most common unsecured loans for all types of credit scores:

• Payday loans

  Payday loans are short-term loans you can get when you don’t have money saved for unexpected expenses. You borrow these loans from a lender and pay them back when you get your next pay stub.

• Personal loans

  Most personal loans are medium-term loans typically repaid over 1 to 5 years. They’re meant to help you get more money for home improvement projects, debt consolidation, medical bills, and more.

• Revolving loans

  Revolving loans are loans you can take out and pay back multiple times. They are usually used to finance the purchase of a product or service, but they require a security deposit to open.

• Student loans

  Student loans are a type of loan you can get to pay for college. You obtain money to pay tuition, fees, room and board, books, supplies, and other related expenses.

Should You Get a Secured or Unsecured Personal Loan?

There are two sides of the same coin. Unsecured personal loans are tricky because they don’t have collateral and may not be repaid if the borrower loses their job or gets in financial trouble.

Secured personal loans allow people to borrow money regardless of their credit reports, but if you don’t repay the loan on time, you may lose your asset. That’s why you should think twice before choosing between these loans.

How Do Secured Loans Work?

When you apply for a secured loan, you must prove that you own an asset (it can also be an investment account) that can be used as collateral.

Once your lender approves your application and agrees to lend you money based on the value of your asset(s), they take possession of those assets until you pay off the loan in full (or get refinanced).

If you have missed payments agreed upon in your contract with them, they will sell your assets at auction.

Types of Secured Loans

There are four most common secured loans:

• Mortgages

  Mortgages are a form of secured debt that you take out to buy a house. You take out the loan and make monthly payments until the loan is paid off.

• Home Equity Loans

  A home equity loan is a type of loan that allows you to get money from the value of your home and spend it on whatever you want (car, family events, business, or holidays).

• Secured credit cards

  Secured credit cards are a form of secured debt and a way to build up your credit score by paying off your card balance in full each billing cycle. They’re a good option if you need a credit card but don’t have a good or excellent credit score because such cards have no minimum credit requirements.

• Auto loans

  An auto loan is a type of loan that allows you to purchase a vehicle. It can be done by either financing the vehicle purchase with banks, credit unions or car leasing.

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