Secured Vs Unsecured Loans – Choosing the Right Option for Your Needs

Secured loans can offer a lower interest rate than the unsecured version, as the lender can consider your collateral when making the loan decision.

Mortgages, car loans and personal lines of credit are typical examples of secured loans, but while some borrowers have such assets as collateral, others don’t and would prefer an unsecured loan.

Interest Rates

A range of factors influence interest rates: for example, unsecured banks face higher risks and, imposing slightly higher costs, those lending secured loans generally feature lower interest rates and, as a result, secured cards become cheaper than unsecured ones.

While mortgages and car loans are expected to be backed by collateral, student loans and credit cards are offered as unsecured loans, for which the borrowers’ credit profiles and finances are the only risk markers.

You might get a lower interest rate and end up paying less overall if you take a chance on an unsecured loan and feel confident you’ll make regular payments. But think about it carefully.

Collateral

Secured loans (like a mortgage or car loan) may use your collateral as a benchmark of how much you need to borrow; if you default, a lender could take you to court or try to reclaim the collateral – say, your house or car. Unsecured loans (like credit cards) could refer your debt to credit bureaus and sell your account off as a collections account.

Since secured lenders are able to repossess the asset in case of default, they are more likely to offer a lower rate of interest and a higher sum than on an uncollateralised loan. Those with a poor credit record are more likely to get a loan, even if their record is poor; some lenders offer secured personal loans attached to your savings/CD account; some credit cards require a $200 refundable deposit that serves as your starting credit line.

Credit Scores

Whether you’re planning to buy a home or consolidate credit-card balances, it’s always good to know how two popular forms of loans work, even if you don’t plan to ever borrow money. A secured loan is one that requires you to put something up as collateral – such as your car, house or sibling who’s answering the phone each time you miss a payment – in order to be approved for the loan in the first place. Unsecured debt doesn’t demand that protecting asset, although it still has rights against nonpayers – for instance, credit-reporting bureaus can get involved if payments are missed (just as a traditional credit card would). Personal lines of credit and student loans are just a couple examples of this type of unsecured debt.

They can also carry a lower interest rate than an unsecured loan, but there is a very big catch: failure to make payments means the lender can take possession of the asset you serve as collateral. Depending on the asset, that could significantly affect your ability to commute to work or make it to a family event. Secured debt can also have a lasting impact on your credit scores, both by defaulting in the midst of delinquency and by rendering missed payments on secured loans.

Payments

Since unsecure loans charge lower interest rates than secured debt, these are likely the best choice for those wanting to build – or refurbish – credit, where his or her credit score is high enough for such an advance – with or without assets to use for collateralisation. And they typically have a faster application process and much faster access to loan proceeds.

Secured arrangements will be more fuss-some for both sides, taking longer to set up than unsecured deals due to the need to confirm the value of the offered asset, not to mention your credit history, credit scores, income and present levels of debt. They would also investigate whether the proposed credit is likely to place you in an untenable situation moving forward.

So while each type of loan has its own pros and cons, it ultimately comes down to personal preference and financial considerations to decide which is right for you. The repayment period tends to be shorter if you opt for a secured loan and you’ll hit your goals faster than you would with an unsecured loan. This might help you if you want money sooner, or if you’re willing to put up an asset as collateral.