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Secured Loans vs Unsecured Loans

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To qualify for a secured loan, you’ll need security, otherwise known as collateral, to put up as a guarantee of repayment. Unsecured loans don’t require collateral, so the lender may decide whether to approve you based on your credit score and credit history.


Those are the basics, but there are other differences between secured and unsecured loans. In this article, we’ll go over those differences and also review common situations where each type of loan is applicable.


Qualifications, Terms, and Conditions of Secured Loans


When you take out a secured loan, you’ll use an asset like your car or house as collateral. Secured loans are considered less risky to lenders because your loan repayment is secured by collateral. Some examples of secured loans are mortgage loans, car loans, and pawnshop loans.


  • Qualification Criteria: You’ll need an asset as collateral to qualify for a secured loan. What you don’t need is a high credit score. Many people build their credit by depositing the amount of money they borrow into a secured account. The lender then puts a hold on that account until the loan is paid off in full.


  • Typical Terms: Secured loans are typically paid off in fixed monthly payments. Interest rates are lower than on unsecured loans, but they could be variable, so monthly payment amounts might change during the life of the loan. There may also be additional fees added, depending on the lender.


  • Conditions: You can keep your asset you used as collateral while you make loan repayments. Make sure you make on-time payments and try not to miss any to avoid a negative impact on your credit score. As long as you don’t default on your loan or miss payments, you won’t lose your collateral.


Qualifications, Terms, and Conditions of Unsecured Loans


Unsecured loans are loans that don’t require you to use an asset as collateral, so you won’t lose that asset if you can’t make loan payments. Some examples of unsecured loans are personal loans, credit cards, and student loans.


  • Qualification Criteria: Some lenders require a higher FICO credit score for an unsecured loan, but others may still approve borrowers with poor or fair credit. Lenders that don’t require you to have a high credit score will look at other factors, like your income and debt-to-income ratio.
  • Typical Terms: Interest rates are usually fixed on unsecured loans, but they can range depending on your credit score. Borrowers with less than great credit can usually get an unsecured loan if they are willing to pay a higher rate. Repayment terms are typically two to seven years.


  • Conditions: Once you take out an unsecured loan, you should make on-time payments each month. Try to avoid late or missed payments so that your credit score doesn’t go down. 


Making a Decision About Secured and Unsecured Loans


To decide whether an unsecured or secured loan is right for you, consider your financial situation, interest rate, and loan terms. If you don’t want to secure an asset as collateral or don’t have one, then you should get an unsecured loan. But if you do have an asset you can use as collateral and want to take advantage of lower interest rates, then a secured loan may be right for you. Do your research and compare loan options to figure out what loan can best meet your needs.


Notice: Information provided in this article is for information purposes only. Consult your financial advisor about your financial circumstances.

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