Secured Loan vs Unsecured Loan: What is the Difference?

what is the difference between a secured loan and an unsecured loan,”

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While some people swear by a cash-only lifestyle, the truth is most of us rely on credit to pay for lifes big expenses over time. When you want to buy a big-ticket item like a house or a car, open or grow a business, renovate a kitchen or pay for college, you can apply for a loan at either your local back or online to help you cover the cost.

When considering your credit options, you might have to decide between a secured and unsecured loan. Secured loans require that you offer up something you own of value as collateral in case you cant pay back your loan, whereas unsecured loans allow you borrow the money outright (after the lender considers your financials).

There are pros and cons to both types loans, so before you decide anything its best to understand the strings attached.

What is a secured loan?

A secured loan is a loan backed by collateral. The most common types of secured loans are mortgages and car loans, and in the case of these loans, the collateral is your home or car. But really, collateral can be any kind of financial asset you own. And if you dont pay back your loan, the bank can seize your collateral as payment. A repossession stays on your credit report for up to seven years.

When you take out a secured loan, the lender puts a lien on the asset you offer up as collateral. Once the loan is paid off, the lender removes the lien, and you own both assets free and clear.

Here are the kinds of assets you can use as collateral for a secured loan, according to Experian:

  • Real estate
  • Bank accounts (checking accounts, savings accounts, CDs and money market accounts)
  • Vehicles (cars, trucks, SUVs, motorcycles, boats, etc.)
  • Stocks, mutual funds or bond investments
  • Insurance policies, including life insurance
  • High-end collectibles and other valuables (precious metals, antiques, etc.)
  • Secured credit cards, such as the Capital One® Secured Mastercard® and the First Tech® Federal Credit Union Platinum Secured Mastercard®, are another example of a secured loan. The collateral, in this case, is the cash you put down (often a $200 refundable deposit) that acts as your initial credit limit. You get your deposit back when you close the account.

    Because your assets can be seized if you dont pay off your secured loan, they are arguably riskier than unsecured loans. Youre still paying interest on the loan based on your creditworthiness, and in some cases fees, when you take out a secured loan.

    What is an unsecured loan?

    An unsecured loan requires no collateral, though you are still charged interest and sometimes fees. Student loans, personal loans and credit cards are all example of unsecured loans.

    Since theres no collateral, financial institutions give out unsecured loans based in large part on your credit score and history of repaying past debts. For this reason, unsecured loans may have higher interest rates (but not always) than a secured loan.

    Unsecured personal loans are growing in popularity. There are roughly 20.2 million personal loan borrowers in the U.S. according to the online lending marketplace Lending Tree. You can take out a personal loan for nearly any purpose, whether thats to renovate your kitchen, pay for a wedding, go on a dream vacation or pay off credit card debt.

    Most people get personal loans for debt consolidation, and since personal loans tend to have lower APR than credit cards, borrowers can often save money on interest.

    Secured loan vs. unsecured loan: what’s the difference?

    When you’re borrowing money, you’ll likely need to make a decision about a secured loan vs. unsecured loan. What’s the difference? Here’s an explanation, and a few credit counseling tips about choosing a secured loan vs. unsecured loan.

    A secured loan is one that is connected to a piece of collateral – something valuable like a car or a home. With a secured loan, the lender can take possession of the collateral if you don’t repay the loan as you have agreed. A car loan and mortgage are the most common types of secured loan.

    An unsecured loan is not protected by any collateral. If you default on the loan, the lender can’t automatically take your property. The most common types of unsecured loan are credit cards, student loans, and personal loans.

    Secured loan vs. unsecured loan: which is right for you?

    There are a couple factors that go into deciding on a secured vs. unsecured loan. A secured loan is normally easier to get, as there’s less risk to the lender. If you have a poor credit history or you’re rebuilding credit, for example, lenders will be more likely to consider you for a secured loan vs. an unsecured loan.

    A secured loan will tend to also have lower interest rates. That means a secured loan, if you can qualify for one, is usually a smarter money management decision vs. an unsecured loan. And a secured loan will tend to offer higher borrowing limits, enabling you to gain access to more money.

    Getting help paying off a secured loan vs. unsecured loan.

    If you have loans and you’re having trouble paying your bills, it’s usually more important to first pay down a secured loan vs. unsecured loan. If you fail to make your car payment, for example, you may end up losing your vehicle. But keep in mind failing to make timely payments on an unsecured loan can drive you deeply into debt, as the interest rates on an unsecured loan may be quite high.

    If you find yourself with too much debt and you’re not sure what to do, American Consumer Credit Counseling (ACCC) can help. As a nonprofit organization, we provide access to credit counselors who help consumers just like you find ways to manage money more effectively and pay off their debts.

    What do credit counselors do? At ACCC, our credit counselors offer free debt advice and connect you with the best resources and solutions for your financial situation. Contact us today for a free, no- obligation consultation. Imagine how great it will feel to finally be on the road to paying off your debts and having a debt-free future!

    Secured Versus Unsecured Business Loans: Everything SMBs Need To Know

    There are two basic types of bank loans that every business owner should be familiar with before signing on the dotted line: secured and unsecured loans.

    Whether you are working with an SBA lender or any other type of lending institution, it is important to understand the difference between secured vs unsecured loans. Generally speaking, this difference will affect the risks you hold as a borrower and will often directly influence the terms of the loans themselves. By taking the time to learn more about how various loans are structured, it will be much easier to determine the best loan options for you.

    A secured loan places the burden of risk on the borrower. An unsecured loan shifts the burden of risk more to the lender. Whether you choose to get secured vs unsecured loans and whether these loans are available to you, all depends on a number of factors, ranging from what type of lender you work with, what assets you own, and your plan for the funds, to your credit history and business health. Of course, within both broad categories of loans, you’ll find a range of options, including high-risk loans and loans that are a bit easier to manage.

    In this guide, we’ll explain the differences between secured and unsecured loans, and how to prepare for a loan application.

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