Secured vs Unsecured Loans

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The Difference Between Secured and Unsecured Loans

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Secured vs unsecured loan – what’s the primary difference? Collateral. Secured loans require collateral and unsecured loans do not require collateral. While there are other differences that we will explain later on, collateral is the main differentiating factor. So which is better to use? The answer usually depends on your personal finances and needs. In most cases, unsecured loans are easier and faster to secure making them a preferred option. We encourage individuals to get educated on secured loans and unsecured loans in order to decide which type of loan is best for their situation. Below, we will help you compare the differences, advantages, and other details of a secured vs unsecured loan.

What is the difference between a secured and an unsecured loan?

As we mentioned above, secured loans require collateral and unsecured loans do not require collateral. Acceptable forms of collateral typically include an asset such as real estate or automobile. If you are using a $60,000 secured loan, you most likely won’t be able to provide a $15,000 vehicle as collateral. Lenders typically require that the collateral provided is of equal or greater value than the loan. Since lenders have collateral in exchange for secured loans, they are less risky for the lender. However, there can be more risk for the borrower. If you default on a secured loan you may risk losing the collateral you provided and damaging your credit. Most lenders offer higher loan amounts, lower rates, and longer terms on secured loans.

An example of a secured loan is an auto loan. If you need money to purchase a vehicle, you can borrow it from a lender. However, in exchange for the money, the lender will be posted as a lienholder on the vehicle’s title. This means if you default on the loan, they can repossess the vehicle and sell it to recoup their money. Another scenario could be if the vehicle is totaled and insurance pays off the vehicle. If money is still owed on the vehicle, insurance will be notified that there is a lienholder. Another example of a secured loan is a home equity loan. In order to qualify for a home equity loan, you will need to have equity in your home. Homeowners can then borrow against the equity in their home and receive cash. In exchange for the cash, the lender uses your home as collateral.

Secured loans can have a longer application process than unsecured loans because they are more complex. If you need funds quickly you may want to use an unsecured loan. Some lenders can fund unsecured loans the same business day. In addition, online lenders can offer a completely online application and approval process. While unsecured loans may have slightly higher interest rates and shorter terms, they are less risky for the borrower. The reduced risk for the borrower can easily offset the higher cost. In addition, all credit types can qualify for unsecured loans.

An example of an unsecured loan is a personal loan. Personal loans can be used for just about anything from home improvements to emergency expenses. Let’s say you have an upcoming wedding that you are planning. You need money for the photographer, florist, limousine company, and other vendors. If you do not have the cash available you could take a personal loan for the amount of money you need. In most cases, you’ll receive the funds as a lump sum that can be repaid over a certain term with interest.

Secured and unsecured loans can be offered with fixed and variable interest rates. Fixed-rate loans are typically easier to manage since the interest rate and minimum monthly payment does not change. Variable-rate loans may be attractive initially but can be a headache to deal with. In addition, if interest rates spike in the market, your ultra-low variable rate loan can turn into a high rate loan costing you more money.

What are the main advantages of a secured vs unsecured loan?

Whether you use a secured loan or an unsecured loan you should receive a lump sum of cash that can be repaid over a certain term with interest. Borrowers can also use a secured line of credit. A secured line of credit is still secured by collateral but works differently than a secured term loan. Regardless of the type of secured loan you choose, they can all offer similar benefits. Let’s look at the advantages of a secured vs unsecured loan.

Advantages of a secured loan

Larger loan amounts
In most cases, lenders have more confidence that they will be repaid for the money they loan with a secured loan. Therefore, they are usually willing to approve higher loan amounts with secured loans. However, you’ll need to have collateral that matches or exceeds the amount of the loan. If you are using a home equity loan you may only be able to borrow 75% to 90% of your available equity. If you are using an auto loan, you may be able to borrow more than the vehicle’s value since there are additional fees such as tax and license.

Lower interest rates
In exchange for providing collateral and reducing the risk for the lender, lenders usually offer lower interest rates for secured loans. Secured loans are typically more ideal for lenders so they want to make offers attractive for borrowers. Borrowers take more risk and usually have to do more leg work to obtain a secured loan. 

Longer terms
The terms offered usually depend on the type of secured loan you use. If you use a home equity loan, you can find terms ranging between 5 to 30 years. While if you are using an auto loan you can find terms up to 7 or 8 years. Some types of secured loans may allow the borrower to postpone repayment for a certain amount of time. 

Possible tax deductions
Some types of secured loans such as mortgages and home equity loans may be tax-deductible. Typically the loan amount itself is not tax deductible but the interest you pay may be tax-deductible. When it’s time to file taxes you should consult a professional to see if you are eligible for any deductions.

Advantages of an unsecured loan

No collateral required
One of the biggest perks of an unsecured loan is that you do not have to provide collateral. If you default on an unsecured loan you may damage your credit but that’s about it. In addition, if you are struggling to repay an unsecured loan, lenders may be more willing to work with you. Lenders may extend terms to lower monthly payments or find another arrangement that makes repaying the loan easier for the borrower. Since they do not have any collateral, they should be motivated to help you repay the loan.

Easier application process
Most lenders have less complicated and faster application processes for unsecured loans. Individuals can apply for an unsecured loan with any bank, credit union, or online lender that offers them. Online lenders typically have very competitive rates and terms. In addition, it may be faster to secure an unsecured loan using an online lender. Acorn Finance has top-rated lending partners that offer unsecured personal loans. 

All credit types can qualify
The terms offered usually depend on the type of secured loan you use. If you use a home equity loan, you can find terms ranging between 5 to 30 years. While if you are using an auto loan you can find terms up to 7 or 8 years. Some types of secured loans may allow the borrower to postpone repayment for a certain amount of time. 

Is a secured loan a bad idea?

Secured loans may not be a bad idea. If you can qualify for a secured loan you should consider the option but it may not be your first choice. Just know that if you default on the loan you will most likely lose the collateral you provide. However, the risk may be justifiable with lower interest rates and longer terms.

What do I need for an unsecured loan?

If you are considering an unsecured loan you should have some kind of credit history and stable income at the minimum. While some lenders may not require any supporting documents, other lenders may request proof of income, identification, residency, or other documents. In most cases, you won’t need much to qualify for an unsecured loan.

What happens if I don’t pay an unsecured loan?

If you miss a payment or two you’ll most likely be charged a late fee. However, if you miss more than a few payments the loan will most likely go into collections and damage your credit report. If you are struggling to repay an unsecured loan we encourage you to contact the lender and communicate with them. The sooner you contact the lender, the better. Most lenders are willing to work with borrowers to help them repay the loan.

Conclusion

In conclusion, secured loans and unsecured loans are both good options. Your personal finances and situation usually determine which type of loan is best for you. If you are considering a personal loan you should apply through Acorn Finance. Acorn Finance has lending partners that offer personal loans up to $100,000 with terms up to 12 years and rates starting at 3.99%. Within minutes, applicants can receive multiple personalized loan offers without affecting their credit score. Acorn Finance makes finding the best unsecured personal loan offer easy and convenient.

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