Sure, you could mow an acre of lawn with a weed eater, dig a hole with a pitchfork, or nail down a screw with a hammer. You’d turn an old saying on its head if you worked Heavier, Instead of smarter, However. Like tools, loans are much more effective and easier to maintain when you use the right loan product for the job – whether it’s buying a new car, getting a mortgage, or consolidating high-yield credit card debt.
Knowing what an unsecured loan is and how it compares to a secured loan can help you choose the right type of loan so that you can, for example, cut high interest rates, reduce debt, or use a major expense ax to get them chop into manageable monthly payments.
What Exactly is an Unsecured Loan? What is a Secured Loan? And how can you best use it?
Think of this as your quick start guide to the properties of secured and unsecured loans, as well as an introduction to how you can use them to repair or renovate your finances.
What a secured loan is – and how best to use it
When you think of “secured loans” you think of collateral. Collateral provides lenders with security against non-payment or “default”. Rather than having to navigate the legal system to repay an unpaid loan, the lender can take possession of the collateral that a borrower put in to back the loan.
Having to provide a car, property, or other valuable asset as collateral for a loan is a sobering thought. But you can’t blame the lenders for wanting to make sure an applicant is serious about repaying the loan.
Common types of collateral for secured loans: automobiles, real estate, investments, insurance policies, and cash accounts.
Securing a loan with collateral not only confirms your obligation to repay – it can also increase your chances of getting that loan approved, especially if there is plenty of room for your credit improvement. Because the risk to the lender is lower, it is often easier to obtain a secured loan than an unsecured loan, although the latter is still the most common type of personal loan.
Check out some of these common use cases for secured loans:
- Financing a new car: You do not need a loan to buy a car, as the car itself can serve as collateral.
- Mortgage a Home: Just like financing a car, you can buy a home with a secured loan.
- Construction loan: If you have poor credit or no credit, you can use your own money as collateral to get a small line of credit from a bank. If used responsibly, this line of credit could grow.
- Emergency Money: When you need money and don’t have good credit, you can borrow money using collateral like a car title or jewelry.
- Business Loans: If you don’t qualify for an unsecured loan or need more than what is offered, you can get a secured loan by securing it with high quality assets like real estate or business inventory.
Benefits of secured loans:
- Lower interest rates
- The possibility of borrowing larger amounts
- Easier to qualify as they pose less risk to the lender
- Lower creditworthiness requirements
Disadvantages of secured loans:
- Approval may take longer as the assets are reviewed
- You have to leverage assets, risk repossession or foreclosure in the event of a loan default
- Smaller loans or shorter terms may not be available
When approving a secured loan, lenders also consider your creditworthiness: your debt, your creditworthiness, the value of your assets, your employment status, and the condition of your accounts. These factors usually weigh more in the unsecured loan application process.
What is Unsecured Loan and How to Use It
It sounds like that not exactly so.
Unsecured loans do not require any collateral. Instead, a prospective lender will check your creditworthiness to see if they are granting you an unsecured loan.
While an unsecured loan does not require collateral like a secured loan, the bank can still reclaim the loan if you do not repay it in full. Banks have legal options in their toolkits, such as lawsuits and garnishment of wages, with which they can protect themselves against defaulted loans.
Here are some common use cases for taking out an unsecured loan:
- Debt Consolidation: A single lower interest loan to consolidate all of those high interest credit cards and other debts.
- Emergency money: A solid emergency fund isn’t always enough, but a sizeable line of credit can save you in an emergency.
- Large Items: Hand in large purchases to fit a large item into your monthly budget.
- Buying a Car: You can use a personal loan to buy a car from a private seller.
- Home Improvement: Homeowners can use a fixed rate personal loan to do home improvement without using the home as collateral, which is required with other options like a HELOC.
- Weddings: Some couples opt for a personal loan to cover large expenses like weddings.
Advantages of unsecured loans:
- No need to use assets as collateral
- Faster approval process as no asset valuation is required
- The potential to take out smaller loans
Disadvantages of unsecured loans:
- Higher Interest
- Higher credit rating required
How a secured or unsecured loan can affect your credit score
While searching for a secured or unsecured loan usually has no impact, once you actually apply, your creditworthiness can be slightly to moderately affected. This impact on your credit score can be due to the hard querying of your credit file as well as the increase in debt from using the loan.
However, if you are seriously thinking about getting a personal loan, you are likely not nearsighted and can appreciate the beauty of the long game.
In the long run, this tough query will fall off your credit record. And if you keep up with your loan payments, your score could go up in a matter of months.
If you pay this loan every month, you will improve your payment history. And when you use this loan to pay off credit card debt, you can score points by lowering your debt-to-credit ratio.
Proving that you can responsibly pay off a loan is one of the most powerful things you can do to improve your credit score. And it could help you secure even better loan terms the next time you search for a secured or unsecured loan.
Shopping for secured and unsecured loans
Now that you are familiar with the key differences between a secured and an unsecured loan, there is a little more you need to do to secure the funds you need.
You might find it tempting to jump on the first pre-approved offer from lenders by names you’ve heard of, especially if the terms are solid, but you might be doing yourself a disservice if you don’t compare the offers.
Buy the best available credit terms for your credit profile by a Credit comparison tool like Fiona. Fiona searches the best online lenders to match you with a personalized loan offer in less than 60 seconds.
If your credit score is at least 620, the platform can help you borrow up to $ 100,000, with fixed rates starting at 4.99% and maturities ranging from 24 to 84 months.
And if you are concerned that you will not qualify, you can check it out online for free. It only takes two minutes. Once you have decided on your loan, you will be able to see your money in a few days. By the way, your information is completely safe – the website uses a higher level of encryption security than many banks.
Fiona also shows you additional offers from other lenders – because by comparing your offers, you can save even more money in the long term.