Americans are borrowing more than ever with the total of personal loans reaching $120 billion. This money comes in many forms and helps people pay for everything from a new home or car to their education.
If you need to take out a loan, start by comparing secured vs. unsecured loans. By understanding their pros and cons, you can make a smart financial decision for the type of loan that works best for your financial needs.
Read this guide to figure out which is right for you.
Secured vs. Unsecured Loans: A Comparison
Both secured and unsecured loans fall under personal loan types that you can apply for through a lender. A secured loan will require you to have an asset that can secure the loan. Examples of this in action are mortgages backed by your home or an auto loan back by the car.
An unsecured loan doesn’t require you to have an asset that can secure the value of the loan. A personal loan or student loan are examples of this type of loan.
If you default on your secured loan, the lender can take possession of the collateral as satisfaction of the loan. Although, you may still owe any remaining balance should the collateral not cover the total value of the loan. This is not the case with an unsecured loan.
Why Choose a Secured Loan
If you don’t have a strong credit score and report, then a secured loan can help you gain approval for a larger loan or one with better terms. Lenders are more likely to work with borrowers because there is a tangible asset that the lender can use to recoup their money. This means that you may qualify for a secured loan despite getting denied for other loans.
There are a few types of secured loans that are commonly available.
- Home equity line of credit
- Car loans
- Boat loan
- Secured credit cards
- Title loans
A car loan and title loan are not the same things. A car loan is when you borrow to make the initial purchase. A title loan is when you borrow against a car that you already own outright.
Why Choose an Unsecured Loan
Borrowers that have a strong credit score and solid income history may prefer to seek out an unsecured loan. This will keep your assets safe as lenders can’t automatically step in and take possession.
- Signature loans
- Personal line of credit
- Credit card as a loan
- Peer to peer
- Student loans
These loans tend to be smaller than secured loans. The lender takes on more risk, so they tend to keep loan amounts lower to limit the risk exposure.
Apply for a Loan Today
This comparison of secured vs. unsecured loans is a smart place to start. To figure out which type of loan is right for you, look at your credit score, income history, and need. Larger purchases such as homes and cars will have better terms when you secure it with the item purchased.
If you only need to borrow a small amount and you have a strong credit score, then an unsecured loan may be the perfect solution. Don’t be afraid to shop around and look at all of your options before you choose a lender and loan.
Browse our other economy and finance themed articles for more financial advice.