If you ever took out a loan, you have probably heard of personal loans and that they can be used for pretty much anything. Personal loans have two types – secured and unsecured. Here we will explain the difference and how to choose the right one for you.
As we mentioned, personal loans have two types: secured and unsecured. Each one of them has its own set of pros and cons. That’s why it’s essential to know the differences before making a choice.
When it comes to secured loans, they are backed up by collateral, usually a home or a car. Simply put, if you halt the loan, the lender can take your asset to cover their loss. That’s why lenders usually go for the approval of this type of loan. With that said, they usually come with a lower interest rate.
On the other hand, unsecured loans don’t require any collateral from your side. Because of that, getting qualified for them is harder, and the lender can’t take your asset to cover their loss if you halt the loan. Compared to secured loans, they usually have a higher interest rate.
So, how to know which type of loan is the right fit for you? It all depends on your financial situation. Secured loans are a better option if you are looking for a more significant amount to borrow and have good credit. On the other hand, if your credit is bad or you can’t qualify for a secured loan, a better option is the unsecured loan.
What is a Secured Personal Loan?
As stated, secured personal loans are backed up by collateral. So, if you halt the loan, the lender can take your asset to cover their loss. Usually, as collateral, many people use either their car or a house, but you have other options, such as investments, jewelry, or even art.
The main advantage secured loans provide is that they come with a lower interest rate. That’s because once you put collateral, lenders are more likely to approve this type of loan since it’s less risky. The main setback they have is that if you halt the loan, you can lose your collateral.
Before taking out a loan, compare both secured and unsecured loans to find out a better option for you.
Secured Personal Loan Benefits
If you were looking to take out a personal loan, you probably wondered if a secured loan is better for you than an unsecured one.
These are some of the benefits these types of loans bring:
- Bigger amounts to borrow – Since you are putting collateral, lenders will usually give you a bigger amount of money since the loan is secured, and they know they will get their money back.
- Lower interest rates – Since fewer risks are involved, lenders give lower interest rates to borrowers.
- Better repayment terms – Another good thing they offer is longer repayment terms compared to unsecured loans. The term usually depends on the amount you borrowed.
- No need for a co-signer – Since you are putting collateral, you will not need a co-signer simply because your asset plays as a safety net for your loan in case you are not able to pay it back.
Secured Personal Loan Drawbacks
If you want a secured personal loan, it’s crucial to know there are setbacks.
The main cons you need to know are:
- You can lose your collateral – Because you are putting your house or a car as collateral, you can lose your asset if you default the loan.
- Fewer options to borrow money – When it comes to secured loans, you can only take them from a bank or credit union. If you don’t manage to get approved, you will need to look for alternatives.
- Bulky penalty – Since they have longer terms, this can increase your total cost. The lender can give you a hefty fine if you can’t pay the loan.
What is an Unsecured Personal Loan?
This is a type of loan that doesn’t require any collateral to be able to get it. When it comes to unsecured loans, you will not have to put your house or a car to secure it. They are usually used for medical expenses, home renovations, or even already existing debt you may have. Because you are not putting collateral, unsecured loans usually have higher interest rates.
Unsecured Personal Loan Benefits
Here are some benefits of unsecured personal loans to think about:
- No collateral needed – Since there is no collateral needed, you will not risk losing your house or a car if you don’t pay back the loan.
- You can take it from online lenders – In comparison to secured loans, this loan can be obtained online.
- Hands-free usage – There is no set thing for what unsecured loans can be used for, such as renovating a house, buying a new car, or even funding your wedding.
- Short repayment time – They have shorter terms than secured ones, meaning you can save some money if the interest changes.
Unsecured Personal Loan Drawbacks
Here are some of the most common setbacks with unsecured personal loans:
- Higher interest rates – Since you are not putting collateral, this can result in higher interests because lenders don’t find this option very secure.
- Harder to qualify – In order to get approved for this loan, you will need good credit because the lender needs to make sure you can pay the loan back.
- It puts your other assets at risk – Even though you are not putting collateral, the lender can still take your other assets to cover their loss.
Secured Personal Loan vs. Unsecured Personal Loan: Interest Rates
Both secured and unsecured personal loan have their own set of pros and cons. That’s why it is important to know their differences before you take one out.
The most significant difference they have is the interest rate they offer. When it comes to secured loans, they tend to have lower interest rates than unsecured loans. This is because you will need to give collateral for a secured loan, while you don’t have to for unsecured. Because of this, lenders find secured loans less risky than unsecured ones since they know they can get their money back in case of a loss.
Before taking out a personal loan, compare different lenders to find the best interest rate. The interest rate will depend on your credit, income, and other factors.
Secured Personal Loan vs. Unsecured Personal Loan: Which Is Better?
If you were looking to take a personal loan, you have questioned whether a secured or unsecured loan is better.
When it comes to secured loans, they are backed up by collateral as a way to secure the loan. It can be your car, a house, an investment that you might have, or any other valuable asset. If you halt the loan, the lender can take your asset to cover their loss. Since you are putting an asset to secure the loan, the interest rate is lower.
While you are not putting collateral with unsecured loans, this can result in a much bigger interest rate. This is because lenders find this much riskier since there is nothing to secure the loan. Keep in mind that with unsecured loans, if you are unable to repay the money back, the lender can give you a hefty fine.
Both secured and unsecured loans can be a good fit for you. It all depends on what is more comfortable for you and your finances.
We discussed secured and unsecured personal loans, their pros and cons, and which one to get. While we can’t tell you which exactly would suit you the best, we gave you useful information to help you decide what’s better for you and your budget.
Both types are very good and provide you with the necessary financing to buy a house or a car or cover any other expense. We recommend you research different lenders to find the best interest rate and generally best loan terms.