Key Differences between Secured and Unsecured Loans

Key Differences between Secured and Unsecured Loans

Published:

6 Min Read

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

Difference Between a Secured and Unsecured Loan

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.
secured vs unsecured loan

How Do Unsecured Loans Work?

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

Application:

To apply for an unsecured debt loan, you typically fill out an application and provide information about your income, employment, and credit history.

Credit check:

The lender will make a soft credit check of your credit health to determine your creditworthiness (not through credit bureaus) and the interest charge they can offer you. But if you borrow it from the bank, there will be a hard credit pull.

Approval:

If approved, the lender will give you an offer that includes the loan amount, interest rate, and repayment terms.

Loan Agreement:

Once you accept the loan offer, you’ll sign the loan contract and accept all the loan terms and conditions.

Debt Repayment:

You will make monthly payments in fixed installments until the loan is fully paid, usually within a few months or years.

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.

personal loan secured or unsecured

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.

Ready to get the funds you need? Apply for a loan today with 1F Cash AdvanceApply

Marsha Welch

Written by Marsha Welch

Written by Marsha Welch

Marsha Welch is a professional personal finance expert, qualified financial writer and speaker, author of her own blog on financial literacy. She has a Bachelor of Science in Economics obtained at Duke University and over 15 years of experience under her belt. After five years of working in financial niche, Marsha realized she wanted to be useful to businesses and individuals who want to modernize their wealth management or need an innovative financial planning solution. To make it happen, she joined the team of Legacy Financial, where she worked for about nine years, providing goal-oriented financial guidance to her clients. After nine years of helping people reach their financial goals, Marsha becomes a part of the 1F Cash Advance’s team in order to help those who need it most. Her years of study and the knowledge helped her become an outstanding author, able to grab readers’ attention instantly.

More