July 23, 2021

What Is the Difference between Unsecured Loan and Secured Loan?

Jan 14, 2021

While most of us wish to have a cash-only lifestyle, the truth is that you cannot avoid credit throughout your life. Even the most financially disciplined individuals rely on loans when faced with an unexpected expense or when they want to buy big-ticket items.

 You may be forced to borrow money when you want to purchase a car or house, open/grow your business, pay for college, or cover an unexpected expense.

When considering your credit options, you need to decide between secured and unsecured loan.  Understanding the difference between these two terms can help you make an informed decision which can have a long-term effect on your financial health.

In this post, we discuss the difference between secured and unsecured loans while highlighting the pros and cons of each.

Secured Loan

Secured loans are typically protected by an asset.  Sometimes, the item purchase with the loan such as a car or home serves as the collateral security. In such a case, the lender will hold the logbook or title deed until the loan is paid in full. Other items such as bonds, stocks, and valuables personal property can be used to secure the loan as well.

Secured loans are the most common way to borrow significantly huge amounts of money. In this case, the lender is only willing to lend you huge sums of money on the promise it will be repaid in full and on time. Putting your home or car on the line is a good way of reassuring the lender that you will do all you can to repay the loan amount plus accrued interest on time.

A secured loan means that you are providing security that you will repay the loan amount plus accrued interest.  As such, you enjoy relatively lower interested rates and longer repayment terms.

However, failure to repay the loan on time can be catastrophic. The lender may sell your collateral to recoup the loan amount, causing you to suffer a double loss.

Unsecured Loan

On the contrary, an unsecured loan doesn’t require any collateral though you are still charged relatively higher interest rate and sometimes fees. Personal loans, student loans, credit cards, and a no credit check loan are all perfect examples of unsecured loan.

Since there is no collateral, lenders mostly give out unsecured loans based on your credit score and history of repaying debts. But it isn’t uncommon to come across an online lender offering an unsecured no credit check loan.

You can take out an unsecured loan for almost any purpose. Whether you want to pay for a wedding, finance your holiday, pay off your credit card debt, or renovate your kitchen, an unsecured loan may be the best option for you.

In most cases, an unsecured loan lender will approve your loan request because he/she believes that you have the financial resources to repay the loan on time. Therefore, you will be judged based on your character, capital, capacity, and conditions.

You need to assess all these conditions before applying for an unsecured loan to increase your chances of approval.

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