If you are shopping for a loan, you have a choice between secured and unsecured personal loans. However, how would you know which one to choose? Knowing the differences will help you choose the right type of loan product and make a plan to get out of debt.
Differences Between Secured And Unsecured Personal Loans
Bankrate points out some examples.
- Secured loans are backed by collateral and unsecured loans are not – A secured loan is backed by a collateral such as your home or car. On the other hand, unsecured loans are given based on your creditworthiness.
- Interest rates tend to be lower on secured personal loans – Because the lender has an asset guarantee, the interest in secured loans tends to be lower.
- There are more restrictions on what an unsecured loan can be used for – For most unsecured loans there are minimal restrictions on how you can use the money.
- Secured loans often have higher borrowing limits – Borrowers may be able to win approval for higher loan limits with a secured loan versus an unsecured one. TD Bank, for example, says it will lend up to the balance in the customer’s deposit accounts for secured loans; unsecured loans max out at $50,000.
- For borrowers with faulty credit, secured personal loans are easier to get – If you have poor or little credit, you may not be able to get an unsecured loan from most lenders, although some online marketplace lenders specialize in loans to borrowers with weak credit. A secured loan is normally easier to get, as there’s less risk to the lender.
- Secured personal loans are for borrowers with collateral and the will to risk losing it – If a borrower has no collateral to back the loan, for example, they won’t be able to take out a secured loan. And an unsecured loan may be the best option for someone who doesn’t want to place their assets at risk in case of default.
If you’re struggling to pay off debt, ACCC can help. Schedule a free credit counseling session with us today.