Difference Between Secured and Unsecured Personal Loans
If you are considering taking out a loan, it is important to learn as much as possible first. You need to learn about the process and what will happen when you take out a loan. One of the most important things you need to research is the difference between a secured and unsecured personal loans.
If you default on your loan, there can be serious repercussions. It includes a negative effect on your credit score. But there are other serious consequences that can happen if you take out a secured loan. You need to learn about both before you make a decision.
What Are Secured Loans?
According to Wikipedia, a secured loan is one where the person who is taking out the loan promises or pledges an asset as collateral for the loan. This makes your debt a secured debt, in that the collateral is securing your loan.
Some of the most common kinds of secured loans are auto loans or home loans. In those cases, you took out the loan to borrow the auto or the home. The lender can take the auto or home if you don’t pay. Your car could be repossessed, or your home could go into foreclosure. The lender can then sell your car or home in an auction. If they couldn’t get the full amount of the loan back, you would still owe that much on the loan.
This is the reason that you can be forced to carry full coverage insurance on your collateral if you have a secured loan. In those cases, the lender still has a shared interest in the item or property, so you have to protect it for both of you.
What Are Unsecured Loans?
An unsecured debt is the opposite. In that, the debt is not associated with any kind of property. Wikipedia informs us that unsecured loans are all those loans which are not secured or protected by collateral. The lender has a link on your property when your loan is secured. He can take certain actions in case of a bankruptcy or liquidation.
If the loan is unsecured, the lender has a more general right to your property or assets. How this plays out depends on your jurisdiction. It can vary a lot from state to state. The important point is that the lender has a lot more to lose generally with an unsecured loan. Indeed, there is nothing to back up the money which was originally borrowed. This can lead to risk-based pricing. A situation where the rates are higher than those for a secured loan.
According to Investopedia, there is more and more of a market for unsecured loans. It is being driven by factors such as newer technology. The risks are higher, and recouping the losses can be more difficult. Lenders often have to resort to methods like garnishing the wages of their debtors in order to make good on the loans, or putting a lien on the lender’s home.
What’s the Difference Between a Secured and Unsecured Personal Loans?
You can find good advice online about different kinds of monetary matters. You can also find good breakdown about what the difference is between a secured and an unsecured personal loan. The first major difference you will notice is the cost. Qualifying for a secured money may save you money in the long run. The reason is that the annual percentage rate will probably be lower for a secured loan.
That means that if you can, you should probably take out the secured loan. Unsecured loans are usually best for those who have average or poor credit and may not qualify for a secured loan, or for those who don’t have collateral to offer. You should always be careful what you offer as collateral too; you don’t want to risk losing your home, for instance, for a small unsecured loan. Examples of secured loans include
- Mortgages for real estate, including houses and condominiums;
- Home equity lines of credit, where you are borrowing against the principle of your home;
- Automobile loans, for cars, trucks, motorcycles, etc. and
- Some banks even allow you to use CDs or other kinds of assets as collateral.
So the loss of an asset is the other important consideration, even if you qualify for a secured loan. If you lose your home, for instance, you could end up out on the street; if you lose your vehicle because you used it as collateral, you might find yourself without a ride to work.
Difference between secured and unsecured credit card
You might consider whether you can use a credit card to get a cash advance instead of taking out a personal loan. The Huffington Post explains the ins and outs of secured and unsecured credit cards. You may need to apply for the card ahead of the time you want to take out the cash, so that you are sure you have it. Many people keep their secured and unsecured credit cards so that they will be able to take out cash in an emergency.
Secured credit cards
They are through a bank and they’re backed up by the actual money you have deposited in the account. Your account limit, then, is equal to the amount of money in the account, and you won’t be able to take out more cash than that. You can use a secured credit card even if you have little or no credit history, and you can even use it to build your credit. Payments you make may be reflected on your credit report as you take out money and deposit it into the account.
Unsecured credit cards
They are what most people probably think of when they think about credit cards. There is no collateral associated with an unsecured credit card, so your credit limit will be based on factors such as your credit score and payment history. One of the biggest negatives with unsecured credit cards is that unless you have great credit, you might be paying high interest fees. Unless you pay off the card immediately, you could end up paying it off for years and paying an enormous amount of fees.
Even secured credit cards usually come with fees, though, and it is better to compare your options and educate yourself before making a choice about which one will work best for you. Don’t let them trick you with hidden fees, like administrative fees. Make sure you understand up front whether you will be paying an annual fee or if there are any other requirements.
If you are sure about your choice, though, this might be one of the best ways to build credit so that you do qualify for a loan at a later date that has lower fees and interest rate. It is best to be cautious if you are building or rebuilding your credit — start off with small transactions and make sure you pay off your bill every month. The most important thing lenders will consider when they look at your history is that you paid your bill off every month on time. You can keep an eye on your own credit score so that you will know when you can move up to a card that comes with better terms.
Secured vs. Unsecured Personal Loans Interest Rate Pros and Cons of Secured Loans
Interest rates are one of the most important considerations. Many people have accepted a loan with very poor terms because they felt desperate at the time, and then they struggled to pay the loan because of the harsh conditions.
There are of course factors when looking at interest rates and many people take out loans without being fully aware of the risks they are taking.
Advantages of Secured Loans
- You can get a lower monthly payment by spreading out your repayment period over a longer period of time. The disadvantage of paying off over a longer time is that it could increase the overall amount you end up paying back.
- You could ensure that you are getting the best rates by getting a secured loan.
- If you change your entire mortgage you could lose out on the great rate you have. Home equity loans often have very favorable terms in their own right, and there are regular specials by various banks.
- A secured loan doesn’t have restrictions, so you can use it for anything you want. Remortgaging or getting a home equity loan could mean having to abide by certain restrictions.
Disadvantages of Secured Loans
- Lenders find real property to be a very compelling piece of collateral. That is why mortgage rates are often much lower than any rate you could get by taking out a secured loan.
- Depending on what you are using the money for, the usefulness of the secured loan could be long expired while you still have months or years left to pay. You might want to think twice about taking out a 5-year loan on your yearly vacation, for instance.
- The administration fees you have to pay up front, such as valuation fees, could increase your overall debt.
- The monthly payment for your secured loan will become part of your monthly bills, and it might take away from other monthly needs you have, even basic ones.
Pros and Cons of Unsecured Loans
There are both advantages and disadvantages to unsecured loans. As long as you are making an informed decision, you should feel confident when you are taking out an unsecured loan from a reputable lender.
Street Directory offers advice for those who may need cash for personal purposes. Here are the main advantages and disadvantages:
Advantages of Unsecured Loans
- Unsecured loans are available to anyone. Whether or not you own or rent, you can get an unsecured loan if you qualify.
- You don’t have to worry about losing your collateral, whether it be your home, your vehicle or bank bonds or CDs.
- You can get the money fast. Because there is no need to appraise the property, the process for getting a secured loan can be completed from start to finish on the same day sometimes.
Disadvantages of Unsecured Loans
- Again, the biggest problem for most unsecured loans is the high interest rate. Because they aren’t backed by collater, lenders charge higher interest fees on unsecured loans.
- With an unsecured loan, you can probably only get a limited loan amount. Unsecured loans will probably not go higher than a few thousand dollars, as compared to a loan against your home which could go as high as your home’s value.
- Unsecured loans usually have no flexibility. If you want to pay your loan off faster you can, but you won’t be able to get a more favorable rate or otherwise change the terms of the loan while you are in repayment.
Various Types of Secured and Unsecured Loans
There are actually various types of personal loans that might be available to you so that you can get money fast.
Secured Personal Loans
As discussed, these are loans secured by collateral. The pros include that the rates may be better, even for someone with poor credit. The main cons have to do with losing the collateral if you can’t pay the loan back.
Unsecured Personal Loans
These are personal loans with no collateral, and the main advantages are that they are easily accessible. On top of that, you can use them any way you want. The biggest disadvantage is the high fees associated with them.
Personal Lines of Credit
These are also secured personal installment loans, and they usually unsecured loans. They are usually offered to people with higher credit scores. They hey tend to have higher limits than regular unsecured loans. Many people like personal lines of credit because they can borrow money, pay it back, and then borrow money again against the same line of credit. Personal lines of credit are flexible, and you can use the money any way you want.
Debt Consolidation Loans
These can also be either secured or unsecured. It depends on your credit. You would use a debt consolidation loan to combine all your debts into one. Thus you only have one monthly payment. Terms vary widely, but they can be advantageous if you have good credit and want to use a debt consolidation loan to pay off higher interest loans.
Wedding Finance Loans
You need good credit to get a wedding finance loan. Even with this, the interest rate may still be high. Still, it may be a good way to pay for everything from the dress to the honeymoon so you have on payment.
Vacation Loans and Travel Loans
Although you may need good credit to qualify, these can be advantageous because they might be less expensive than paying for everything with credit cards in another country. Also, known as a fly, now pay later vacation loan for travel. By the time exchange rates and transaction fees are taken into account.
Medical Finance Loans
You might not want to take out an unsecured loan for medical needs. Indeed, there is normally no interest rate applicable for medical bills. If you do need to get a medical finance loan, you might want to consider a debt consolidation loan. These loans can be expensive and hard to get.
Home Improvement Loans
Most home improvement loans are taken out against your home, and they add value to your home. Because they are thus secured, they tend to be easier to get and hav lower interest rates.
Co-Signer Personal Loans
If you don’t qualify for good terms on your own, you may be able to get favorable terms for an unsecured or secured personal loans if someone with good credit signs with you. In those cases, that person needs to understand that if you default, the lender can get the money from the co-signer too.
How to Get an Unsecured Personal Loan Quickly
Here are the ways you can go about getting an unsecured personal loan:
- Banks are a traditional method, but their tighter restrictions and policies can take longer.
- Online or Peer-to-Peer Lenders are quicker than banks, but still might take longer than a day.
- Friends may be able to help.
- Online Lender Finding Services can get your money quickly, within hours or by the next day. They can help with various kinds of loans by quickly finding the lender that can best help you.
An Infographic Explaining the Difference Between Secured and Unsecured Personal Loans
To see visually the differences between secured and unsecured personal loans, here is an infographic with all the definitions and the advantages and disadvantages of each. Only you know your own circumstances and which kind of loan is best for you.
In Conclusion – Secured and Unsecured Personal Loans
There are probably many more kinds of loans than you imagined, but this works in your favor. If you need secured emergency cash loans, you can use an online lender finding service that will get the money for you with terms to suit your history. There are also unsecured cash loans online for those with poor credit or who do not want to risk collateral. You can find out within minutes if you qualify.
Lisa has practiced primarily in two fields, law and libraries, and has conducted research and written necessary papers for both disciplines. She has studied social sciences, languages, and computers. She also writes for various personal finance blogs and shares a passion for teaching consumers how to budget and save money.