Featured image by Pasja1000 via Pixabay
Did you know that personal loans can be either secured or unsecured? A secured loan can have a lower interest rate, but you will need collateral, such as a savings account, to back the loan. Meanwhile, unsecured loans do not need an asset, but you must pay a higher rate.
Before you apply for a personal loan, you must first know the difference between secured and unsecured loans. Remember that the difference could affect how likely you are to get approved for the loan, the interest rate you will get, and whether you must risk some property to get the loan.
RELATED ARTICLE: 8 FREQUENTLY ASKED QUESTIONS ABOUT SMALL BUSINESS FINANCING
Here’s a look at how both work and a few things you must remember to determine which type of personal loan is ideal.
Secured Versus Unsecured Loans: Overview
Loans like personal loans normally come in two types: secured and unsecured.
To get a secured loan, you must offer something you own as collateral. You agree that if you decide to default on the loan, your lender or bank gets to take it. In the case of an auto or mortgage loan, your car or house is normally the collateral.
In the case of a secured loan, the collateral might be a certificate of deposit or a savings account.
Meanwhile, an unsecured loan does not need you to put up any collateral for the loan. The lender cannot claim collateral as compensation if you do not repay the money.
Here’s the link for further details about secured and unsecured loans.
However, there’s something you risk if you default on both a secured or an unsecured loan: your credit. Sean Martin D. Plantado, head of customer service at Digido.ph, notes that lower credit scores can make it more challenging for you to get approved for other credit types.
Secured Versus Unsecured Loans: Interest Rates
Unsecured loans often have higher interest rates than secured loans. The reason behind that is lenders perceive unsecured loans as being riskier. The lender may worry you are less likely to repay the loan as agreed without providing collateral. A higher risk for the lender often means a higher rate for you.
On the other hand, a secured loan would have a lower rate. For instance, you can be eligible for a secured loan with a low APR, depending on the amount borrowed, term length, and credit history.
Secured Versus Unsecured Loans: Advantages
What are the benefits of secured and unsecured loans? Here’s a breakdown:
For secured loans:
- You can borrow larger amounts of money with secured loans.
- Secured loans are often ideal for people with less-than-perfect credit histories.
- Repayment periods on secured loans can be longer, unlike those on unsecured loans.
For unsecured loans:
- You won’t need to offer any collateral. You are not borrowing against the value of anything you own, so your property is not at risk if you cannot meet the repayments and decide to default. However, getting into difficulties and missing repayments will substantially affect your credit score. This could also affect your capability to borrow in the future.
- In most cases, it may be easier to pay off an unsecured loan early. In contrast, a secured loan may have less demanding early exit fines.
- Unsecured loans let you choose how long you wish to repay, with many borrowers making fixed repayments for between one and five years. Meanwhile, the minimum duration or term for most secured loans is five years.
Where Can You Get Secured and Unsecured Loans?
You will find various types of lenders that provide personal loans, These include online loan companies, credit unions, and banks.
Certainly, lenders can differ widely in their loan-qualification requirements and the interest rates they offer. However, banks often decide to lend to clients with higher credit scores.
Credit unions might be less strict in their requirements when making loans. They might also provide lower interest rates. However, you must be a member to qualify.
Online lenders may also provide lower rates for customers with decent credit. On top of that, they can be convenient, as the whole loan process is managed online.
Which Type of Loan Is Better for You?
How can you determine which type of loan is suitable for your needs? It’s important to look around, apply for various loan pre-qualifications, and compare the offers you get from various lenders.
Terms and rates for both secured and unsecured loans can differ significantly, so looking around could help you find the lowest fees or interest rates. This could help you save money and pay off the loan sooner.
If you have a savings account or other asset that your lender will accept as collateral, you might prefer going to a secured loan. Your interest rate and APR would be lower.
However, if you do not have an asset that your lender will accept or are not eager to risk losing an asset that you currently have, apply for an unsecured loan.
How Can You Qualify for a Personal Loan?
There is no specific, step-by-step way to qualify for either a secured or unsecured loan. That’s because each lender has different requirements for credit scores and other aspects. Also, every borrower’s situation is different.
That said, there are a few basics you can anticipate. Many lenders will check your credit history and scores, verify your income, and consider how much debt you have before approving the loan.
The lender will ask you whether you earn enough to afford the monthly payments. If you apply for unsecured loans, your income, current debt, and credit will likely get more scrutiny, as there is no collateral to back the loan.
If you decide to apply for a secured loan, your lender would like to feel assured about your collateral. They will want assurance that you actually own it outright, and they will want to ascertain its value.
RELATED ARTICLE: 10 FUNDING OPTIONS FOR YOUR STARTUP BUSINESS
Both secured and unsecured loans have unique pros and cons. A secured loan may come with a lower APR, but you must be ready to risk your property and put it up as collateral. Even though defaulting on either loan might mean your credit takes a hit, you won’t need to offer up any property as collateral with an unsecured loan.
If you are still uncertain whether a secured or unsecured loan makes sense for your current situation, you might want to talk to lenders and find out whether you are qualified.
RELATED ARTICLE: WHAT ARE THE BEST SOURCES OF ECONOMIC NEWS?