Secured vs. Unsecured Loans – What’s the Difference? | National news
SAN JOSE, California., September 28, 2021 / PRNewswire / – If you are considering borrowing money, you may come across loans, both secured and unsecured. While secured loans require some form of collateral, unsecured loans do not. However, that doesn’t mean that unsecured loans are always better.
Here’s what you need to know about secured and unsecured loans and how each of myFICO’s can affect you as a borrower.
You can find more information about loans and credits on the myFICO blog at https://www.myfico.com/credit-education/blog
What is a Secured Loan?
A secured loan is a type of loan that is secured by collateral. If the borrower defaults on payment, the lender can seize the collateral and use it to repay the amount owed.
Some types of loans are almost always secured while others may not be secured depending on your credit situation. Here are some common secured loans you may come across:
Home Loans: Mortgages are practically always covered by the property that you are buying with the loan. Home loans and lines of credit are also backed by the equity that you have in your home.
- Car Loans: The lender generally requires that you pledge the vehicle you are buying with the loan as collateral.
- Secured Personal Loans: These loans are sometimes referred to as collateralized or collateralized loans and require that you hold a certain amount of cash in an interest bearing account as collateral for the loan. Depending on the lender, you can borrow up to 100% of the collateral value or less.
- Secured credit card: Secured cards require a prepayment, usually – but not always – the amount of credit you are looking for on the card. In most cases, you will get the deposit back when you close the account, but some card issuers may return it beforehand if you use the card responsibly.
- Loan Builder Loans: Specifically designed for people with poor credit, limited credit, or no credit at all, credit creation loans work a little differently than other loans. Instead of paying you the loan proceeds upfront, they are placed in an interest bearing account while you make the monthly payments. Once you have paid off the loan in full, you will receive the money.
Note that there are other types of secured loans including auto title loans, pawnbroker loans, and life insurance loans. However, these are generally not recommended.
Benefits of secured loans
- May qualify with a lower FICO® Score: Many secured loans are designed for people with less than excellent credit scores. If you’re looking to build up your credit, a secured credit card, secured loan, or secured personal loan can help.
- Usually come with lower prices: While this is not always the case, secured loans often charge lower interest rates than their unsecured counterparts because the lender takes less risk.
- Larger Loans: In some cases, the lender can afford to offer a larger loan amount because it is backed by collateral.
Disadvantages of secured loans
- Can be hard to qualify for: In the case of a secured loan or credit card secured, it can be difficult to get approval if you don’t have enough cash to meet the deposit requirements.
- Standard can get expensive: Falling behind on a loan is never ideal. However, if you default on a secured loan, you will likely lose the asset that you pledged as collateral. For larger loans like mortgages and auto loans, foreclosure or repossession can be a real setback.
What is an Unsecured Loan?
Unsecured loans do not require collateral of any kind. So while late payments can damage your FICO® scores and sometimes lead to collection attempts, your assets will not be repossessed. Some common types of unsecured loans are:
- Personal Loans
- Student Loans
- Credit cards
There are other types of unsecured loans, such as payday loans, but it is best to avoid these.
Unsecured Loan Benefits
- No collateral requirement: You don’t have to worry about raising some cash to get approval or losing an important asset if you can’t afford to pay back the debt in the future.
- Competitive interest rates for high credit borrowers: Still, if you have good or excellent credit, you may be able to qualify for a relatively low interest rate on an unsecured personal loan, student loan, or credit card.
- Fast financing: Since there is no need to transfer money for a deposit or deal with a secured loan evaluation, an unsecured loan may provide you with faster access to your loan money.
Cons of Unsecured Loans
- Generally more expensive: While you can get a competitive rate if your FICO® scores are high, on average, unsecured loans are still charged higher interest rates than secured loans.
- Additional restrictions for borrowers with low FICO® scores: If your credit rating is considered bad or poor – or if you have no credit at all – expect higher interest rates and fees, as well as lower loan amounts.
- Risk of legal action or debt collection: With a secured loan, the lender can simply use the collateral to offset their losses. But with an unsecured loan, they can sell the claim to a debt collection company who can try to sue you for collections. While this is not always the case, it is important to make payments on time to avoid the possibility.
The bottom line
Secured and unsecured loans both have their purpose and in some cases you may not have a choice between the two. Even if you can choose, there are times when one option makes more sense than the other.
The important thing is that, if you want to borrow money, you understand the terms of the loan, the pros and cons of the type of loan you choose, and take the time to buy lenders. Take the time to consider all of your loan options before deciding on the one that best suits your needs.
myFICO makes it easy to understand your FICO balance® Scores, credit reports and alerts from all 3 offices. myFICO is FICO’s consumer division – get your FICO scores from the people who create the FICO scores. Further information is available at https://www.myfico.com.
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