Will I Need Collateral for a Personal Loan?

Josh McFadden

Last Updated: December 8th, 2020

If you are thinking about getting a loan to meet some of your financial demands, there is much to consider. Aside from the obvious things such as how much you need and what you'll use the funds for, you're concerned with interest rates, payback terms, and what your credit score is.

Then there's a little matter concerning secured vs. unsecured loans.

Determining whether your loan is a secured loan or an unsecured loan is critical and will have a significant impact on your liability with the loan.

As a brief review, secured loans are those connected to a type of collateral such as your home or car. Secured loans come in the form of mortgage loans or auto loans where the property or possession you put up as collateral serve as protection for the lender in case you default on your loan. So, if you fail to make regular payments-or any payments at all-on your secured loan, the lender has a legal right to take possession of the collateral, meaning the home, car, or another piece of property that you put up as collateral.

In the case of an unsecured loan, you do not attach collateral to the loan. If you default on an unsecured loan, the lender cannot take away anything you owe. Instead, you're credit will plummet and you could fall into deep debt and find yourself in financial difficulty.

Student loans and credit cards are forms of unsecured loans. Personal loans, too, are usually unsecured, which could come as welcome news if you are considered this type of financing for a home improvement project, vacation, wedding, or any other need you see fit.

Because your personal loan will almost certainly be unsecured, qualifying for it is contingent upon your credit history and credit score, as well as other financial factors such as debt-to-income ratio and employment status. To obtain an unsecured personal loan, you don't need collateral. This means if you default on the loan, you don't have to worry about losing your home or any of the items you may have purchased with the funds.

Be advised, though, if you are unable or unwilling to comply with the terms of your personal loan, your credit score will take a considerable hit, and your ability to qualify for other types of loans-secured or unsecured-will be seriously compromised.

Though much more rare, secured personal loans do exist. Most institutions and lenders that offer these require you to use an automobile as collateral. The advantage of obtaining a secured personal loan over the much more common unsecured personal loan is that the secured type comes with a much lower interest rate. So, if the rate is key factor in your decision, a secured personal loan might be a consideration. Also, in most cases, lenders require applicants of secured personal loans to be homeowners.

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