A secured loan uses property as collateral and an unsecured loan does not. Although the difference seems simple, choosing between the two types of loans means understanding the details and weighing the benefits of each to see which credit option works best for you.
This post takes you through the differences and benefits of both secured and unsecured loans so that you can choose the right credit option that meets your financial needs. We also help you understand how best to use these loans and provide tips for repayment.
With a secured loan, you offer the lender an asset you own — such as a home or car — as collateral in case you cannot pay back the loan.
A number of financing options require collateral, including the following common secured loan examples:
Because lenders often see borrowers of secured loans as more motivated to pay back the money, secured loans may have advantages over unsecured loans. It makes good financial sense to consider the following pros and cons of secured loans.
An unsecured loan doesn’t require you to pledge any assets to borrow money. Instead of relying on collateral, unsecured loans depend on the creditworthiness of the borrower. Borrowers typically need to have good credit to receive approval for an unsecured loan.
Common types of unsecured loans not backed by collateral include the following:
Because lenders see unsecured loans as riskier than secured loans, this type of loan can have several disadvantages. Consider the following pros and cons when evaluating an unsecured loan.
When considering financing options for that next big expense, you may notice both secured and unsecured loans. While these two loan types share similarities, they also differ in important ways. Knowing the key differences between unsecured and secured loans can help you choose the best credit options for your financial situation.
Loans can play an important role in successful financial plans. On the other hand, they can also negatively affect your credit score and financial health if not managed correctly. Before taking out a loan, consider the following steps to help decide if a loan makes sense for you:
Evaluate your credit score: Before applying for loans, see if you have a high enough credit score to qualify. Many lenders look for applicants with good credit, but your bank or local credit union might work with you even if your credit report isn’t perfect. (If you have no credit history at all, check out our tips for how to get credit.)
Research repayment terms: Find out when you have to start making payments and how long you have to pay back the loan.
Check out interest rates and other fees: Interest rates often depend on your credit score and the length of the loan. Some personal loans may charge a percentage of the loan amount upfront, called an origination or sign-up fee, but most will only charge you interest.
Know what your monthly payment will be: Since even one missed payment can damage your credit history, carefully consider how much you can afford each month.
Consider other options: If you need less than $500, it may be better to save that amount on your own or borrow it from friends or family. If you’re trying to pay off debt, you may look into a 0% APR credit card that offers balance transfers rather than applying for a personal loan.
If you’ve already taken out an unsecured or secured loan, you may be looking for ways to pay off your loans early. While the right moves for you depend on your specific financial situation, consider the following tips for faster loan repayment:
Pay more than your minimum amount: The longer you make only the minimum payment each month, the longer you may be in debt. Consider paying a little extra when you can, or even rounding up your monthly payment to the nearest $10 or $50 (for example, paying $300 instead of $257).
Make payments every two weeks (or one extra a year): If you split your monthly auto, mortgage or credit card payment into two biweekly payments, you’ll end up with an extra payment per year (26 biweekly payments make 13 monthly payments) as long as your two payments fall within your due date so that you’re not late. Or to avoid the hassle of pg twice a month, budget an extra monthly payment into your year. Tax refunds and work bonuses may provide opportunities to find that extra payment.
Research loan forgiveness and repayment programs: If you have a federal student loan and meet certain criteria, you may qualify for loan forgiveness or special repayment plans. Ask around at work too: some employers offer assistance programs for employees carrying student loans.
Refinance your loan: If your credit score or financial situation has improved since you took out your vehicle loan, you may get a lower interest rate if you refinance. Similarly, you could save money by refinancing your home loan when interest rates drop or by selecting a shorter term. But do keep your financial goals in mind when refinancing: a shorter mortgage term will likely result in higher monthly payments, whereas a lower monthly car payment could cause you to go upside-down (meaning you owe more than your car is worth).  
Borrowers with bad credit or a limited credit history may find it easier to take out a secured loan than an unsecured loan. However, building your credit and potentially raising your credit score may help you to obtain a loan of any type — especially one with lower interest rates and more favorable terms. You may also improve your credit by taking out a credit builder loan at a bank, credit union or through Self.
Ana Gonzalez-Ribeiro, MBA, AFC® is an Accredited Financial Counselor® and a Bilingual Personal Finance Writer and Educator dedicated to helping populations that need financial literacy and counseling. Her informative articles have been published in various news outlets and websites including Huffington Post, Fidelity, Fox Business News, MSN and Yahoo Finance. She also founded the personal financial and motivational site www.AcetheJourney.com and translated into Spanish the book, Financial Advice for Blue Collar America by Kathryn B. Hauer, CFP. Ana teaches Spanish or English personal finance courses on behalf of the W!SE (Working In Support of Education) program has taught workshops for nonprofits in NYC.
Our goal at Self is to provide readers with current and unbiased information on credit, financial health, and related topics. This content is based on research and other related articles from trusted sources. All content at Self is written by experienced contributors in the finance industry and reviewed by an accredited person(s).
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