Secured vs. Unsecured Personal Loans: Let’s Compare
When you are having financial difficulties, and your savings account is not enough to cover them, you have to look into various kinds of funding. Personal loans are generally an excellent way to get quick cash and cover expenses.
However, when it comes to choosing between an unsecured vs secured loan, the decision depends on your personal situation.
The main difference between the two is that secured loans require collateral, whereas the other ones do not. As unsecured lending can be risky for creditors, these are usually more expensive. You are more likely to get high interest rates and strict requirements with an unsecured loan.
Secured personal loans are the type of personal lending that requires collateral. This means that to receive funds, you have to put up your property or other valuables as a guarantee. If you fail to make the necessary payments, the creditor has the right to take these assets from you.
However, even if you have a poor credit history, you can still borrow money. By putting up collateral, you will get lower interest rates as well. A secured loan is provided by online lenders, credit unions, and banks.
Secured loans can be used for pretty much anything that comes to mind. There are different types, such as home equity loans, car, business, and life insurance loans. As an example, if you take out a mortgage loan, you can use the property as collateral.
Pros And Cons Of Secured Loans
A secured loan can be a lifesaver in many situations, especially if your savings account is not sufficient. However, it might not be best for everyone. Find some of the pluses and minuses to help you make a choice below.
|1. Interest rates are much lower
When you put up your home or vehicle as security that you will make monthly payments, you will likely get low rates.
|1. Require collateral
If you do not make regular monthly payments, you are at risk to lose your home or another valuable possession.
|2. Good credit score is not a requirement
As you do not present a risk to the lenders with a secured personal loan, most of them will not look into your credit score. The main reason for this is collateral.
|2. Borrowing more than you need
As you put up collateral, you might have the option to take out a large amount of cash. Make sure you do not get more than you actually need!
|3. Used for various purposes
There are multiple ways in which you can use secured loans: home improvements, medical emergencies, car repairs, for your savings account, and so on.
|3. Applying can be tedious
The overall application process for a secured personal loan can be lengthy, and it can take up to a month to get the funds.
|4. Multiple lenders
You can get a secured personal loan from online lenders, banks, or credit unions. There are plenty of options on the market!
Why Get Secured Loans
Secured loans carry a significant amount of risk for the borrower. For that reason, you have to take your responsibilities seriously. If you do not absolutely need this type of funding, you should look into other options.
However, if you are looking for a large amount with a lower interest rate, secured personal loans are right for you. Moreover, if you know your credit history and you had issues in the past, that will not be a problem.
Most lenders will not consider your credit score. Make sure to look into a secured personal loan to get a cheaper loan in the long run!
Where to Get Secured Loans
A secured personal loan is not that difficult to obtain. They are offered by numerous online lenders, credit unions, and banks. With some lenders, you do not even have to visit their physical location. All of the information is just a few clicks away.
The majority of online lenders even allow for prequalification. That way, you can check your eligibility without hurting your credit score. With the digitalization of the lending process, there are a lot more opportunities.
Bear in mind that credit unions provide funding to members only. However, their credit unions rates are usually much lower. Banks might have fewer requirements, but the interest rate might be a bit higher.
Unsecured loans are simply borrowings that do not require any kind of security. They may also be known as signature loans. That’s because they only need your signature to complete the transaction! Although no guarantee is required, each financing company will have its own set of conditions.
When you are applying to get cash, the lender will assess your creditworthiness. Your eligibility will be determined by looking at your wages, cash on hand, and debt. Such a loan may or may not be the best option, depending on the borrower’s job situation and intended purpose for the money.
You can prequalify and evaluate various offers and interest rates with the top creditors. That is undoubtedly a benefit because you will not experience a hard credit inquiry. In addition, because they are so much more convenient, most creditors now accept applications submitted online.
Pros And Cons Of Unsecured Loans
Unsecured personal loans are not meant for everyone but can be a great choice for those whose savings account is currently drained. Depending on your demands and circumstances, they have benefits and drawbacks.
To help you better understand this borrowing choice, see some of the advantages and disadvantages listed below.
|1. Fast access to cash
The creditors will provide the funds promptly if you have been accepted for the personal loan.
|1. Credit history
Lenders demand a strong or excellent credit score to reduce their own risk.
|2. No collateral
In order to be eligible for unsecured loans, you do not have to put any property at risk.
|2. Interest rates
As you pose a higher risk to the lending company, you might be charged high interest on your unsecured personal loan.
|3. Flexible repayment terms
Once you borrow money by getting a personal loan, you might have over two years to repay it in monthly payments.
Most lenders will have very strict requirements for this personal loan.
|4. Lump sum
The lender will send you a single payment for your personal loan as soon as you accept the terms!
Why Get Unsecured Loans
The main reason that unsecured personal borrowings are popular is that there is no collateral. Many people feel uncomfortable about putting their houses at risk. If you feel the same way and your credit score is good, then unsecured loans are for you.
With such loans, you can get money quickly and cover any urgent expenses. The application process is fast and easy, especially with online lenders. Even the approval is a lot quicker as there are no additional possessions that need evaluation. They are certainly a great option if you want to take out a smaller amount of money.
Where to Get Unsecured Loans
You can request unsecured personal loans with a bank, a credit union, or an online lender. The best part is that there are a lot of options, so you can compare and contrast. Look into the best interest rates and whether you fit the requirements.
Applying is simple and can be done online with certain lenders.
However, you can also visit the local branch of your desired bank. If you opt to get a personal loan with a credit union, bear in mind that you have to be a member first. This might not be the quickest option as it would take some time to get the membership and earn the trust.
Secured Loans vs. Unsecured Loans: Key Differences
When your savings account is not enough to cover necessary expenses, you can always look into secured and unsecured loans. As we have previously established, the key difference between secured and unsecured personal borrowings is collateral.
However, they do differ in other aspects as well. There are many factors to consider when opting for one of the choices.
Secured personal loans require some sort of guarantee. This is usually in the form of a house, property, vehicle, etc. However, unsecured loans do not require you to put up collateral, but you must have a good credit score.
Once you grasp the distinction between the two, you can go into further detail. There are quite a few differences between these borrowings, and we are going to explain some of them. See below for more information, so you can make an educated decision.
Simply put, collateral means that you are pledging something you own as security. A lot of lenders want to know that they will not lose any money. If you fail to make monthly payments on your personal loan, they are legally allowed to take the item/property you pledged instead.
In case you do not default with repayment, your collateral will remain intact. As long as you are responsible and honour the agreement, this should not be an issue. Many are anxious about collateral and putting their belongings at risk, which is why they choose to avoid getting a secured personal loan.
Unsecured loans do not ask for security, but they will have higher rates. They might even end up being more expensive long-term. In the end, the choice is all yours, and it depends on your financial abilities.
With most lenders, secured loans have lower interest rates compared to unsecured ones. The reason for that is that unsecured loans do not have any other kind of security that you will repay the amount. A secured personal loan is riskier for you, but the rates are low and affordable.
With an unsecured personal loan, your loan is only based on your credit history. Since this is the most important factor affecting this type of borrowing, it is logical that the rates can be high. Keep in mind that the rates vary depending on the lender, so make sure to look around first!
Secured personal loans generally have higher borrowing limits due to the collateral. They are giving you access to a lot of money. That does not mean that you should take as much as they can provide.
Firstly, ensure you can repay the personal loan without struggling. You should also consider whether you have any cash in your savings account.
On the other hand, personal loans without collateral have lower borrowing limitations since there is no guarantee you will pay them back. They are usually up to 50,000, but this can depend on the lending company as well. A secured personal loan can go up to a million, depending on the type of your loan.
Even though every lender has different criteria, some requirements are the same across all creditors. There are key features to be eligible for a certain type of borrowing. See below for some of the requirements that differ for secured and unsecured lending.
- You have to put up collateral. This can be your apartment, house, car, etc.
- There is a minimum amount of your annual income.
- Having a good credit history is not the main factor.
- You do not have to put up collateral to apply for unsecured loans.
- You must have a good credit score to qualify.
- Proof of income is required to show that you can repay the personal loan in time.
With most legitimate lending options, a good credit score is required. Even when it is not essential, it can bring you great benefits. For example, you can get lower interest rates or qualify for a higher loan amount.
While secured personal loans do require a good history of credit, this is not a factor that determines your eligibility. They are already getting their security through your assets. In this case, the lender is not too interested in your previous loans and payments.
However, when it comes to unsecured loans, they mainly rely on credit scores. As there are no personal assets involved, this is their priority. They need to ensure that you are a responsible borrower.
Usage Of Borrowed Money
The great part about both unsecured and secured loans is that you can use the funds for various purposes. Unsecured lending can be a better fit for urgent expenses. It takes a bit longer to get approval and funds when using secured lending.
There are different types of secured loans, such as mortgages, auto, and home equity loans. On the other hand, there are secured personal loans, which can be used for home improvements and other emergency expenses.
An unsecured loan can be used to start a small business, pay medical bills, or even buy something that you cannot afford using your savings account.
Secured Loans vs Unsecured Loans: Which One To Choose?
Secured and unsecured loans are available with online lenders, a bank, and a credit union. You can put the funds towards almost anything you want, even your savings account. The main distinction between the two is collateral.
You have to evaluate your financial situation and figure out which option suits you better. Are you willing to go for higher interest rates, or do you want to put up your home as a guarantee? Does your credit score count as good?
If you are looking for lower rates and you are willing to put up security, then you should choose a secured personal loan. In case you are feeling uneasy regarding that option and are not willing to take that risk, you should select an unsecured personal loan. Make sure to consider everything before making a decision.
What loan is easier to get: secured or unsecured?
It is easier to get a secured loan as the lenders will not be looking into your credit history as much. However, the approval and the funding can last a bit longer due to the evaluation of your assets.
How much can I get with a secured loan?
This depends on the value of your property. You can usually borrow up to half of your collateral. For example, if your house is worth one million, you can get up to $500,000.
Are personal loans safe?
Personal loans are safe if you handle them responsibly. They can cause potential damage to your credit score if you miss out on some payments. You might also use some assets if you do so. But, if you make regular monthly payments and respect the agreement, there is no danger.
What kind of personal loans can I have with bad credit?
Secured personal loans are much more suitable for those that have bad credit. Putting up collateral can get you lower interest rates and quicker approval. Unsecured lending is not recommended with bad credit, as your interest rate will be through the roof.