The Pros and Cons of Secured and Unsecured Loans

Now you have decided it is time to shop for a loan. Well, you need to be acquainted with these loans and have a better understanding. Loans are categorized into two major types: secured loans and unsecured personal loans. Whether you know the terminology or not, you’re probably familiar with the underlying concepts. Secured loans usually need an asset to act as collateral, such as a car or a home. On the other hand, unsecured loans aren’t tied to a specific asset. Typically, they are based on the borrower’s creditworthiness and income.

It is therefore important to have a clear understanding of secured and unsecured loans in detail will help with wise borrowing. In this guide, you will learn all the nooks and cranes of secured vs. unsecured personal loans.

What’s a Secured Loan?

Often, lenders offer loans that are tied to an item, particularly personal property. Here, you can provide a car, house, bonds, etc, to secure the loan. After providing an asset to act as collateral, the lender assumes the ownership until you fully repay the loan. In case of default, the lender can sell the asset and use the money to repay your loan. This property is otherwise termed as loan collateral.

Additionally, the lender can also place a lien on your property whereby whenever the property gets sold, the lender has the right to get the money to pay off the remaining balance before you get hold of the money from the sale. A mortgage loan is a type of secured loan where the house being bought acts as a security. If you fail to repay the full loan, then the lender will foreclose and sell your home to settle up with the debt. If you sell the home, you’ll have to repay the mortgage immediately.

What’s an Unsecured Loan?

Also known as personal loan, this type of loan involves borrowing money from the bank or a lender. The money is offered in a lump sum, and the borrower agrees to make regular monthly payments plus interest until the end of the loan term without default. If you miss making payments or you pay it late, you may be charged a penalty fee which can affect your credit history.

Unsecured loans don’t require a property to act as collateral on your loan. Rather, the loan will be given to a borrower depending on their capability to repay back the loan. What’s more, you will be required to provide details like your income, employment, credit history, etc, to let the lender know if you are a risky borrower or not.

The key difference between secured loans and unsecured personal loans is that a secured loan is tied to an asset as collateral, while unsecured loans are provided based on the creditworthiness of a borrower. Weighing the pros and cons will help determine the right path for you.

Pros of Secured Loans:

• Collateral acts as a layer of protection for lenders.
• Allows borrowing of large amounts of money since the lender is confident that you’ll repay the money either from the loan repayments or the sale of your property.
• It comes with lower interest rates than unsecured loans since they are less risky.
• Eligible borrowers can take tax deductions.

Cons of Secured Loans:

• The asset will be seized by the lender in case of default.
• Money borrowed will only be used for specified purposes like purchasing of an asset such as a car or home.

Pros of Unsecured Personal Loans:

• It doesn’t necessarily require collateral for a borrower to be eligible for the loan as compared to a secured loan.
• They are instant personal loans due to the quick approval process.
• Borrowers can choose the repayment period between 1 to 5 years. On the other hand, secured loans have a fixed repayment duration, which is likely to be five years.
• It is easier to repay the unsecured personal loan early with fewer penalty fees compared to secured loans.

Cons of Unsecured Personal Loans:

• Involves higher interest rates than the secured loans due to the high-risk level.
• It is difficult to get a loan with poor credit or lack of a regular salary, and you will have to get a co-signer with a good credit history.

When to Get a Secured Loan:

• If you have great financial flexibility.
• When you want to buy a property.
• You need a lot of money to repay over a longer period.
• You have poor credit to qualify for an unsecured loan.

When to Get Unsecured Personal Loan:

• You need quick funds with minimal paperwork.
• You want a smaller loan amount.
• You do not have assets for security.

Conclusion

In a nutshell, secured loans come with low rates with high borrowing limits. But the asset is at risk. Conversely, unsecured loans aren’t very risky, but they have high rates with low borrowing limits. Therefore, you need to consider the options carefully and select a loan that best suits your needs and your situation.