Secured vs. Unsecured Personal Loans: Which One Should You opt For?
Looking for a personal loan for your next big purchase but unsure of how to go about it?
We know how hard it is to finance your purchase, so we’ll help you make the right decision here!
We have listed everything you need to know about secured and unsecured personal loans.
Based on your financial health, you can choose the right loan for you.
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What are Secured and Unsecured Personal Loans?
A secured loan demands collateral. An unsecured loan does not.
Collateral is an asset having a monetary value, such as a house, real estate, or a car.
Under a secured loan, you promise to repay the amount borrowed in the stipulated time to the lender. Failing to do so, the moneylender can obtain possession of your collateral.
There is minimal risk to the lender, and hence the interest rates are low.
Home loans and car loans come under secured personal loans.
But it doesn’t work that way with unsecured loans. Your assets are not strapped to the loan here.
Does that mean unsecured loans are better?
Probably not. The interest rates are slightly high, and one of the main qualifiers here is a solid credit score. Student loans fall under unsecured personal loans.
Your credit-worthiness qualifies you for both the type of loans, with a little flexibility when it comes to secured loans.
Difference between Secured and Unsecured Personal Loans
If you’re unsure which personal loan to choose, take a look at these notable differences between the two and see which aligns well with your needs.
Collateral backs Secured Loans.
Unsecured loans do not require any collateral, unlike secured loans, but you might end up with a massive debt if you fail to repay your loan.
It all boils down to collateral when it comes to secured and unsecured loans. You keep your house or car as collateral when taking a house or car loan.
Unsecured Loans Have High-Interest Rates
Since the lender is at greater risk with unsecured loans, the interest rates are high as opposed to secured loans.
With no collateral, the lender is risking his money, making it quite challenging to qualify for unsecured loans.
Qualifying for Secured Loans is Easy
Getting a secured loan is relatively easy. A solid credit score is not mandatory.
Though you’re risking your asset, the parameters are less stringent to qualify for a secured personal loan.
You can Access More Money with Secured Loans.
With high borrowing limits, you get access to more money, and they have long repayment terms.
It’s not the same with unsecured loans – they have fixed repayment terms.
Types of Secured and Unsecured Loans
There are various types of secured and unsecured loans you can go for. They are as follows:
Secured loans:
Secured loans have low interest rates and require you to keep your asset as collateral. You can lose your asset if you default to repay the total sum.
- Business Loan
- Mortgage Loan
- Land Loan
- Car Loan
- Student Loan
- Term Loan
- Revolving Loan
When you’re taking a business loan to operate your business or handle wages, the building or inventory is kept as collateral.
House loans come under this. Your house is kept as collateral, and if you default to repay, the lender can seize your house.
Collateral is your land here. You are giving the lender the authority to possess the land if you fail to repay the loan.
Or auto loan is when you take a loan to buy automobiles. Your car or the vehicle is kept as collateral here.
Unsecured Loans:
Unsecured Loans do not require collateral and have high-interest rates since you promise the lender you will repay by word of mouth. It is straightforward.
Students who take loans for colleges come under unsecured loans. They can repay the loan regularly once the student is employed.
A term loan or personal loan is when the lender pays a fixed amount to the borrower and expects to be repaid before a fixed timeline.
The borrower can withdraw the credit amount without exceeding the credit limit. A perfect example of revolving loans can be credit card.
Interest Rates and Where to Get
We know by now, which has a lower interest rate. Since a secured loan is less risky to the lender, it has a low rate of interest. The lender can be your banks, online lenders, or credit unions. Based on your convenience, you can opt for either of these.
Which Type of Personal Loan Best Fits for You?
Depending on your credit score, financials, and credit history, you will be approved for an unsecured loan. However, if you have bad credit, you can go for a secured loan.
You can borrow as much money as you want with low interest rates, but your assets are at stake. It depends on you to choose the best possible option based on your ability.
You can evaluate individual qualifiers such as interest rates, your income, and other requirements before choosing the right personal loan for you.
Being responsible and making informed decisions with your finances is essential to having a healthy financial life.
Bottom Line
If you’re financially unstable and have a low credit rate, you can opt for a secured loan. But you should be confident enough to handle the monthly payments.
If you have a good credit rate, you can go with an unsecured loan as it has low-interest rates.
All in all, it’s totally up to you to decide which type of personal loan to apply for.
Though both have their upsides and downsides, it all comes down to what you want. Research and understand before diving in to make huge financial decisions.
