Personal Loan: Secured or Unsecured? What's the difference?
When shopping for a personal loan, you have 2 choices: secured or unsecured. You also have a third choice called “Winning the Lottery.” But since the odds are not in your favor, let’s go back to the first 2 choices.
When shopping for a personal loan, you have 2 choices: secured or unsecured. You also have a third choice called “Winning the Lottery.” But since the odds are not in your favor, let’s go back to the first 2 choices. What’s the difference between a secured and unsecured loan?
This is fairly simple and straightforward. A secured loan is backed by collateral – something of value like your home or car – that the lender places a lien on in case you don’t make your loan payments. Common types of secured loans are mortgages, boat loans, and car loans. An unsecured loan is backed only by your creditworthiness. This is another reason to maintain a good credit history. Common examples are personal lines of credit, student loans, and credit cards
2. Interest rate
Secured loans typically will offer lower interest rates. Why? Because the lender assumes lower risk since they can recover at least part of their losses if you default by confiscating whatever you put up for collateral.
3. Loan amount and terms
Secured loans typically are available with higher loan limits. They often are also available with longer terms, giving the borrower lower monthly payments
So which type of loan is best for you? Like many financial decisions, it comes down to your individual situation. If you have poor credit, or a short credit history, an unsecured loan may not be possible to get. A secured loan is easier to get, and typically offers friendlier terms, but you may not want to risk losing something of value should circumstances arise that prohibits you from paying your loan. Conversely, if you have excellent credit, there may not be any interest rate advantage to taking out a secured loan. So, consider how much you want to borrow, your ability to pay, and your credit rating. Then shop around for the best loan for you.