You may have heard the terms secured loan and unsecured loan and not quite understood what they mean or how one of these might be better for your situation than another. So, we’re going to walk you through these two types of loans and help you decide which one to use to meet your financial needs.
A loan that uses collateral is called a secured loan. It’s any type of lending transaction that requires the person borrowing money to give the lender some sort of physical surety for the loan. They may give the lender the title to their vehicle or deed to their property. They may give them a valuable collection of jewellery or a rare collectible. It has to be something that has value that the borrower owns.
If the borrower is unable to pay back the loan amount and interest in a timely manner, then that borrower forfeits their collateral. If you are a potential borrower and you are handing over your property or vehicle for collateral, that can seem risky, and it is. This is the kind of loan you really only want to use if you cannot afford the terms of a personal or unsecured loan or if your credit is so poor you would be otherwise ineligible for another type of loan.
In other words, you should only use a secured loan if it is your only option and you really need the money. There’s simply too much risk involved for anyone to recommend secured loans as the way to go for most borrowers. These are loans that are designed to work in favour of the lender, ensuring they deal with very little risk and always get something for their trouble.
An unsecured loan is another name for a personal loan. This is a loan that is based on your credit score or your income. You don’t have to put down any collateral, and the basis of the loan is simply your reputation in the financial world or the proof that you have steady income that can be used to pay back the loan on time.
The amount of the loan may also be determined by how much money you make or what your credit score is like. If you don’t make much money each month, you have numerous bills to pay or your credit score is low, then you likely won’t get a
sizable loan. Now, there’s certainly some risk involved with one of these loans as well, but it is all monetary risk. If you pay late or fail to pay, then you will have fees accrued. However, you won’t be giving up your house or vehicle just because you fell behind on your loan.
The only reason not to go with this type of loan is if you simply can’t meet the minimum requirements for a loan that’s the size you need. If your credit is too poor for anyone to lend you the amount of money you require, you may not be eligible for the personal loan you desire.
An unsecured loan is definitely the best option, though. If you were to lose your vehicle to a secured loan, you may have trouble getting to work and not be able to pay back your loan at all. An unsecured loan simply requires that you pay out more money when you fail to pay on time. For most people, that’s far more manageable, and it gives them more to work with.
You should look at all your options when you go to apply for a loan. It’s possible that you have some valuable collateral you can use that you can live without. However, for the majority of borrowers, an unsecured loan is a much safer way to go.