If you’re looking at taking out a personal loan, you’ve probably discovered that there are two main types: secured and unsecured. So what’s the difference and which is better?
An unsecured loan is exactly what its name implies: it is not “secured” by any collateral, meaning what you owe is not tied to or “backed” by your home or some other valuable asset that you own.
A secured loan is the exact opposite of an unsecured one. The money borrowed is backed by collateral or something of value that the borrower owns.
Pros to Unsecured Loans
- You’re not risking assets being taken from you if, for some reason, you can’t pay back the loan.
Cons to Unsecured Loans
- Unsecured loans almost always charge higher interest rates than secured loans.
- Unsecured loans are harder to get; you’ll need a solid credit history and strong credit score to qualify.
Pros to Secured Loans
- Because there is less risk involved for the lender – thanks to the collateral put up by the borrower – the interest rates on secured loans are almost always lower than those of unsecured loans.
- Again, due to less risk, those with a few credit issues have a better chance of qualifying for a secured loan than for an unsecured loan.
Cons to Secured Loans
- If you default on a secured loan, the lender can seize your home, car or whatever assets you used as collateral.
Which type of loan will work best for you depends on three main things:
- How much monthly payment you can afford; your payment amount will be heavily influenced by the interest rate of the loan.
- Your credit-worthiness.
- What you own that would qualify as adequate collateral and your willingness to risk it.