Secured vs. Unsecured Loans
- June 13, 2017
- By: Greenpath Financial Wellness
There are pros and cons to choosing secured or unsecured loans, which is why we have highlighted the differences for you here.
Secured loans are protected by an asset. The item purchased, such as a home or a car, can be used as collateral. The lender will hold the deed or title until the loan is paid in full. Other items can be used to back a loan too. This includes stocks, bonds, or personal property.
Secured loans are the most common way to get large amounts of money. A lender is only going to loan a large sum with promise that it will be repaid. Putting your home on the line is a way to make sure you will do all you can to repay the loan.
Secured loans are not just for new purchases. Secured loans can also be home equity loans or home equity lines of credit. These are based on the current value of your home minus the amount still owed. These loans use your home as collateral.
A secured loan means you are providing security that your loan will be repaid. The risk is if you can’t repay a secured loan, the lender can sell your collateral to pay off the loan.
Secured loans offer some pluses over unsecured loans:
- lower rates
- higher borrowing limits
- longer repayment terms
Examples of Secured Loans:
Unsecured loans are the reverse of secured loans. They include things like credit cards, student loans, or personal (signature) loans. Lenders take more of a risk by making this loan, because there is no asset to recover in case of default. This is why the interest rates are higher. If you’re turned down for unsecured credit, you may still be able to obtain secured loans. But you must have something of value that can be used as collateral.
An unsecured lender believes that you can repay the loan because of your financial resources. You will be judged based on the five C’s of credit:
These are yardsticks used to assess a borrower’s ability to repay the debt. Conditions include the borrower’s situation as well as general economic factors.
Examples of Unsecured Loans:
- Credit Cards
- Personal (Signature) Loans
- Personal Lines of Credit
- Student Loans. Tax returns can be garnished to pay unpaid student loans
- Some Home Improvement Loans