Secured Loans vs. Unsecured Loans

For all those considering to buy a home, car or planning to start a new business venture, weighing the common lending options is a must-do!

Determine the difference, purpose, pros & cons between secured and unsecured loans to take a call that is suitable for your financial health.

The basic difference between these two is that; a secured loan needs an asset as a collateral, while it is not necessary for an unsecured loan. It affects your borrowing limit, interest rate, and repayment duration.

Let’s take a look at how both loans work to decide the best for you.

Secured Loan 

It is one of the most common ways to acquire large business loans. The borrower gets money with a promise to repay the amount with pre-determined interest.  The loan is protected by an asset to make sure the borrower repays the loan.

Assets include car, home, stocks, bonds, & other personal property that can be used as collateral. The lender will hold the collateral until the loan is paid.

The risk associated with a secured loan is that the lender has the authority to sell or repossess the collateral to pay off the credit, in case the borrower fails to meet the terms! 

Benefits of Secured Loans:

  • You can get larger borrowing limits.
  • Lenders charge lower interest rates as the secured loans come with collateral.
  • Secured loans often come with a longer repayment period. 
  • Repaying on a schedule will enhance your credit rating.

Drawbacks of Secured Loans:

  • They possess a higher risk to the borrower, as their entire asset is on stake.
  • The valuation of assets along with other legal checks makes the application process longer.
  • Failure to make the payment reduces the ability to borrow money in the future and damage credit rating.

Examples of Secured Loans:

  • Home Equity Line of Credit
  • Auto Loan
  • Recreational Vehicle Loan
  • Mortgage Loan
  • Home loan

Secured Loans

Unsecured Loan

Unsecured loans cover things like personal (signature) loans, student loans, credit cards, etc. that are not tied to any asset. Lenders take a risk in this kind of loan as there is no asset involved as collateral in case of default.

If your unsecured small business loan application is declined, you’re still eligible to apply for secured loans. But you need something valuable to put as collateral.

An unsecured loan requires a good employment history, credit score, current debt, stable & secure source of income, and other factors for approval.

Advantages of Unsecured Loans:

  • You get money without putting up any collateral
  • No need to worry about losing your personal property.
  • The application process is simpler and requires less paperwork.

Disadvantages of Unsecured Loans:

  • The lender may limit the amount of money to minimise the risk.
  • Unsecured loans have a higher rate of interest as they are not backed by any collateral. If you have a good credit history, you may get a lower rate of interest.

Examples of Unsecured Loans:

  • Signature Loans
  • Student Loans 
  • Credit Cards
  • Lines of Credit (Personal)

Unsecured Loan

Conclusion

If you are having trouble deciding which loan is best for you, Call 703-399-1685 to get in touch with our experts to get financial guidance to save the money and get the solution that matches your financial goals.