The Difference Between Secured And Unsecured Loans

You’ve likely heard the terms of secured loans and unsecured loans. But maybe what you haven’t heard is an explanation about what these terms mean, and how these types of loans can impact your financial decisions. But knowledge is power, as they say, and knowing more about each of these types of loans could make a significant difference when it comes to making borrowing decisions now – and in the future.

Here’s a simple guide to understanding the different characteristics of secured and unsecured loans.

What Is A Secured Loan And What Can It Do?

A secured loan involves providing the lender with some form of collateral, which provides security against nonpayment (default) of the loan. If a loan isn’t repaid in full, the lender can avoid using the legal system to recoup losses by taking possession of the collateral submitted to guarantee the loan. Collateral serves to affirm your commitment to repayment of the loan, and may also improve your chances of being approved for a loan. Common types of collateral include real estate, cars, insurance policies, cash accounts, business inventory, and investments. The approval process for a secured loan generally includes a review of your creditworthiness, including your debt-to-income ratio, assets value, credit scores, employment, and the overall health of your accounts.

In short, a secured loan can help you finance a car, mortgage a home,  build credit, get a business loan, or obtain emergency money. It’s a good bet since it’s easier to qualify for, there are usually lower interest rates, lower credit score requirements, and the potential to borrow larger amounts. The drawbacks are that smaller loans or shorter terms may not be available. The asset review could make the approval process longer, and there may be a need to leverage assets, which risks repossession or foreclosure in cases of loan default.

What Is An Unsecured Loan And What Can It Do?

Unlike secured loans, unsecured loans don’t require the security of collateral; instead, a potential lender will review your creditworthiness to determine if they’ll extend you an unsecured loan. Although an unsecured loan doesn’t require you to put up collateral, the lender still has recourse to recoup the loan should you default. If the loan isn’t repaid in full, lenders can avail themselves of legal options such as lawsuits or wage garnishment.

An unsecured loan can help you with one-time expensive purchases such as paying for wedding costs, buying a car from a private seller, financing home improvements, or when there is a need for emergency money. They also can allow you to consolidate debt into a single lower-interest loan. This also has the advantage that you can borrow smaller amounts with a faster approval process since assets aren’t reviewed or needed to be leveraged as collateral.

The drawbacks are that higher interest rates and a higher credit score are needed to secure one.

To compare secured loans and unsecured loans, consider using a free loan comparison tool like Fiona, which searches the top online lenders to match you with a personalized loan offer – all in less than 60 seconds. If your credit score is at least 620, the Fiona platform can help you borrow up to $250,000, with fixed rates starting at 2.49% and terms from 6 to 144 months.

Using Fiona to see if you qualify for a loan won’t affect your credit score. In addition, you’ll have peace of mind knowing that your information is totally safe, as the website uses higher encryption security than many banks.