What are the Differences Between Unsecured and Secured Loans?

There are a number of loan options available to consumers. Among them are secured and unsecured loans. The one you choose or can qualify for depends on your credit score and history. It’s important to know the difference between unsecured vs. secured financing and how each of them work. It can help you to make a better decision when you need to borrow money for an emergency, regardless if you are using it to pay for a new car, make repairs on your home or simply buy groceries.

 

What is an Unsecured Loan?

 

An unsecured loan is a type of loan that is not backed by an asset. As such, if you end up defaulting on re-payments toward it, the lender cannot take possession of your property to pay back the loan. Two good examples of unsecured loans are a traditional student loan and a fast installment loan applied for online. These loans are not bound to any collateral that the lender can seize and use toward repayment in the event that you are unable to pay them back.

At the same time, however, in order to qualify for an unsecured loan, you must have a regular income and good credit history. Loan amounts on unsecured loans also tend to be smaller than those for secured loans. They also come with higher APR amounts because they are not backed by collateral.

Unsecured loans are the best loan options for individuals who have good or excellent credit who don’t want to take the risk of losing an asset. These types of loans can be acquired from banks, credit unions, and online lenders. Interest rates on them vary depending on your income and credit score income.

What is a Secured Loan?

A secured loan is a type of loan that is backed by something you own that is worth value. Generally, the loan is protected by an asset, such as a house or vehicle. The asset serves as collateral for the loan in the event that you are unable to pay it back. Agreeing to a secured loan means that you are aware that the lender can repossess whatever asset you put up toward the loan if you are unable to pay it back as per the agreement.

In addition, it’s important to note that if you are unable to pay back a secured loan and the lender takes possession of your property as payment toward it, you may still owe additional money. If you default on a loan, the lender sells your property to recover the money owed on the loan. However, if there is still an outstanding balance remaining on the loan because the property didn’t sell for the full amount, you are responsible for paying the remainder.

Secured loans tend to be best suited for individuals who don’t have the best credit and who don’t qualify for an unsecured loan. The annual percentage rate (APR) on these loans are typically lower due to the fact that they are backed by collateral. However, in spite of that benefit, it’s important to weigh the risks of getting a secured loan. If you default, the lender can take possession of the asset you use to back it.

Secured loans can be acquired at banks, credit unions and through online lenders.

Regardless of the type of loan you take out, it’s important to thoroughly do your homework before applying for one. You should aim for a loan with an interest rate that falls under 36 percent and ensures that the one you choose best fits your needs.

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