Understanding Secured vs Unsecured Loans

By: Contributor | May 13, 2014 (Edited July 7, 2017)

unsecured vs secured

When it comes to borrowing from a bank or other financial institution, there are many different options available to suit the unique needs of consumers. The two major types of loans are secured and unsecured loans, which each tend to serve the consumer in a different way. In order for you to make the right decision in terms of which type of loan is best for your needs, you must first understand the parameters of each. So what exactly are secured and unsecured loans, and which one is best for you?

Secured Loan: Assets for Collateral

A secured loan is one in which the borrower puts up an asset to use as collateral for the loan, which gives the lender some protection. Common forms of collateral on secured loans include the home on a mortgage or a vehicle on a car loan. When collateral is placed on a home or a vehicle, a lien is put on the ownership of each asset by the bank or financial institution to ensure that the loan gets repaid. Other items that can be used as collateral to obtain a secured loan include stocks, bonds, and personal items.

Secured loans tend to be the best method, and sometimes the only method, for obtaining large amounts of money on loan from a bank or financial institution. These kinds of loans also tend to have lower interest rates and longer terms of repayment for higher amounts of money loaned.

Unsecured Loan: Higher Interest Rates

Unsecured loans, on the other hand, do not require an asset for collateral. Since there is no collateral involved, the bank or financial institution takes a greater risk in giving out unsecured loans; they have fewer options for recourse should the borrower default on their loan payments. With this in mind, unsecured loans are usually not for as much money, and generally come with higher interest rates and shorter repayment plans. Common forms of unsecured loans include credit cards, student loans, personal lines of credit, and other personal loans.

Which Type of Loan Is Best for You?

When deciding between a secured and unsecured loan, you should first consider the amount of money you require. If you are looking for a higher amount, you are likely better off putting up an asset for collateral and receiving a secured loan with a lower interest rate. If, however, you are interested in obtaining a smaller amount of money and would like the flexibility to choose the length of the term for repaying the loan, an unsecured loan could serve you well. Unsecured loans are generally more difficult to have approved, but can be a valuable option for consumers with good credit scores and credit histories with little or no debt.

The first step in the decision-making process when it comes to taking out a loan is to understand the pros and cons of each available option. Once you feel you understand the differences, it will be much easier to decide which route is best for you. Of course, a great way to get your unique questions answered is to speak to a financial professional directly.

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