Secured vs. Unsecured Loans: What Every Borrower Should Know

Running out of money is just one scenario when you feel the need to borrow from a direct lender. You may feel the need to borrow money to meet big purchases like buying a house. There are times when you are in a dilemma about whether you should secure your loan. Loans without collateral are preferred to secured loans as there is no risk of losing your valuable asset in case of a default.

What makes different secured loans from unsecured ones is the collateral you put down. You will be absolutely free to use your collateralized asset the way you want, but your lender will retain the tile. This means you do not have the right to sell your car unless you have fully settled your account. Choosing between secured and unsecured loans comes down to your financial situation.

Things you should know about secured loans

A typical example of a secured loan is an auto loan and a mortgage. When you take out an auto loan, your car serves as collateral. You can drive your car the way you want, but the title will not be transferred to you until the full settlement of your debt. In the event of a default, your lender will repossess your car. The risk is even higher when your house is mortgaged.

Upsides and downsides of secured loans

Pros	Cons
You will be able to borrow a larger sum.	You will be tied to the debt for a very long time, especially if you have a mortgage.
You have higher chances of approval despite a bad credit loan.	Longer repayment plans will reduce your monthly payments, but they will cost you more interest in total.
You can take out these loans when you are self-employed, too.	Some lenders might offer variable interest rates, so budgeting is hard.
Interest rates are lower than unsecured loans.	You are at risk of losing your assets in case of a default.

What are the types of secured loans?

Here are the types of secured loans:

• Home equity loans

The equity of your home is the difference between the current market price of your house and your outstanding mortgage. You can borrow against the equity you have built in your house. You can use your equity to refurbish your house or as collateral for buying a second house.

• A second mortgage

It is similar to a first mortgage, but you borrow against the equity you have built in your house. It is not refinancing that allows you to borrow more money using the equity as you can take out a second mortgage from a different lender only.

• Debt consolidation loans

Consolidation loans do not need collateral if the amount of outstanding debt is not too high. It depends on the lender’s policy on how much they can merge into unsecured personal loans with guaranteed and instant approval. They may ask you to put down collateral if it amounts to a large sum of money. Your house will serve as collateral. You may lose it if you fail to keep up with payments.

Ways to get the most affordable deal on secured loans

Secured loans carry lower interest rates, and yet you will have to research them to choose the lowest possible rates to save money in interest payments. The following ways can help you choose the most affordable deal:

• Get a quote from different lenders. Make sure they check soft credit to avoid losing your credit points.
• Keep your credit score good. There is no guarantee that you will get money at lower interest rates despite a bad credit rating.
• Analyze your repaying capacity. Ask yourself if you have a plan B to make payments if you suffer from income crisis.

What should you know about unsecured loans?

You can get such loans from lenders, banks, and credit unions. You do not need to put down collateral to secure a loan deal, so there is no risk of losing your assets. The size of these loans is small, so the repayment size will not be more than a year.

Advantages and drawbacks of unsecured loans

Upsides	Downsides
You can borrow money without losing collateral.	Monthly payments will add a burden to your pocket due to smaller repayment lengths.
Interest rates will be competitive.	Bad credit people are more likely to be turned down. If any lender approves, interest rates will be very high.
The repayment term is small, so they will not cost you as much money as interest payments.	In the event of a default, your credit score will be ruined. You will not be able to borrow more money.

Some lenders may provide you with money without collateral despite a bad credit report if the borrowing sum is so small. They are loans for bad credit on instant approval. They do not offer more than $1,000. You will be required to pay off the full debt on the due date.

What should you consider before taking out a loan?

Here are the factors you should look at while applying for a loan:

• Collateral required or not

Understand the basic difference between secured and unsecured loans before making any decision. The risk is too high if you choose to put down collateral. Ask yourself if you can lower the borrowing sum and avoid putting down security.

• Loan amounts and interest rates

You should look at the size of your debt and the interest you are to pay. A smaller sum of money will be paid down quickly, so you will save a lot of money in interest. Choose an extended repayment term when you cannot make bigger monthly instalments.

• Your credit score

Your credit score plays a vital role to secure a debt at lower interest rates. Maintain your credit rating in good condition.

The final statement

If you are in a dilemma, seek advice from a financial expert and make a decision that suits your current financial condition.