Secured Loans vs Unsecured Loans

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If you are in the process of researching or applying for a loan, you’ve probably come across the terms “secured” and “unsecured” when looking at loan options. The main difference is that unsecured loans do not require collateral, while secured loans do.

There are benefits and drawbacks to each loan, and times where you will want to apply for one over the other.

Keep reading to learn more about how you can use unsecured and secured loans.

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Updated: October 2018
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Unsecured Loans

How do Unsecured Loans Work?

You can apply for an unsecured loan through a bank, credit union, or online lender. Your prospective lender will evaluate your application, review your credit history and score, and take into consideration any other documents they asked for, like proof of income.

Many unsecured loans are personal loans but there are other types as well, such as lines of credit and credit cards.

Unsecured Loans Pros and Cons

Pros: If you are applying for an unsecured personal loan, you can use the money for just about anything.

Another plus, the process of getting an unsecured loan is generally faster than obtaining a secured loan. As Craig Garcia, president of Capital Partners Mortgage explained to Realtor.com, an unsecured loan doesn’t need to be underwritten, and it is possible to walk into a bank and get an unsecured loan that day.

Cons: If you’re comparing secured and unsecured loans, you can typically expect unsecured loans to have stricter lending requirements and less favorable terms.

The application process and requirements favor borrowers with good credit scores. That said, borrowers with poor, bad, or thin credit may be able to obtain a secured loan.

Secured Loans

How do Secured Loans Work?

With a secured loan, you are pledging an asset in exchange for money from a lender.

For instance, if you wanted to buy a new car, you’d likely take out a car loan to finance the purchase. Because you pledged the car as collateral, if you failed to make payments or defaulted on the loan, your lender could seize your car.

Similarly, if you took out a mortgage loan to buy a home, and didn’t make payments, you’d be at risk of losing your home.

Secured Loans Pros and Cons

Pros: Since you are pledging assets, the lender may view you as less of a risk, and offer better interest rates than they would for a regular personal loan. You may also be able to borrow more money with a secured loan than with an unsecured loan.

Borrowers with subpar credit, or little to no credit history, may also find it easier to obtain a secured personal loan.

Cons: The biggest downside to secured loans is that whatever is put up as collateral when you apply the loan can be taken from you if you fail to pay.

Choosing the Right Loan

Whether you apply for an unsecured or secured will depend largely on your personal circumstances.

If you have excellent credit and want a loan to help pay for school, or cover other expenses, an unsecured loan is probably the best choice.

Borrowers with thin or bad credit or who want lower interest rates should research secured loan options. Or if you have a specific use for the loan, like buying a car, it is worth looking into secured loans.

As with any loan, you want to look for the best rate, and understand all the terms of your loan. You also want to be sure you can pay the loan back. For both secured and unsecured loans, failure to repay the loan, or consistently making late payments can harm your credit score.