Secured vs. unsecured loans
When you borrow money from a lender, you may qualify for either a secured or an unsecured loan. Understanding the differences between the two options can help you make an informed decision before you sign any loan agreement. Basically, a secured loan requires collateral, whereas an unsecured loan doesn’t. But what does that mean for you as the borrower, and what are the pros and cons of each loan? Let’s break down what the two options involve.
Loans in this category are “secured” by an asset known as collateral. In the instance of an auto loan or a mortgage, the collateral is the vehicle or house. A secured loan can also be obtained with a deposit or savings account. Because the loan is backed by something of value that can be seized by the lender upon default of the loan, the risk is lower. Therefore the interest rate is lower than it is on an unsecured loan (creditworthiness is still a determining factor in interest rates of both secured and unsecured loans). Other advantages of secured loans include higher limits and longer repayment terms. When a secured loan is paid off, the collateral belongs to the borrower. The obvious downside to a secured loan is that if you fail to repay the loan, you may forfeit the collateral to pay off the debt.
Loans that do not require collateral are unsecured. The loan is granted to a borrower based on criteria like financial status, ability to repay, and credit history. Personal loans, student loans, and lines of credit fall into this category. Unsecured loans are often used for unexpected expenses, larger purchases, educational needs, life events, home projects, or medical care. Because the loan is not backed by any asset, the risk for the lender is considered higher, so the interest rates are also typically higher than on a secured loan. The amount you qualify for and the rate you receive will largely depend on the strength of your credit and your ability to repay the loan.
Lenders differ on applicant criteria, terms, rates, fees, and requirements for funding approval. Be sure to shop around and make sure you are choosing the best loan for your situation. Lendmark Financial can help you explore your options and answer any questions you may have. You can stop by a local branch or start an online loan application today.