Are you in need of some extra money, but aren’t sure which loan is right for you? If you’ve done some research online, you’ve likely come across two basic forms of personal loans to consider applying for. One is a secured loan and the other is unsecured. On the surface, they may seem to be one in the same, however, there are some differences you should be aware of before applying. Below are a few distinctions.
Whether you apply for a loan from a bank or online lender, secured loans, like a car loan, mortgage, or business loans, are financial products in which are offered to those who have an asset or collateral. This collateral can be in the form of a business, house, car, or other items of significant value. Essentially, when you apply for a secured loan, you’re telling the lender that should you fail to repay it on time, that you agree they have a right to repossess your assets.
This does lower your risk to lenders and increases the likelihood of approval. However, it puts you at risk of losing something you value. Not to mention, even if they do take your asset for failure to repay, if they’re unable to recuperate all of their losses, you’ll still be required to pay what is owed. For example, if you default on a mortgage of $300,000, and the house sales at a foreclosure auction for $250,000, you’re still entitled to pay the remaining $50,000 plus interest, legal fees, and other associated costs.
Unsecured loans are quite the opposite. With these types of loans, your assets are not directly tied to your ability to repay the loan. Some examples are personal loans and student loans.This means they cannot automatically repossess your property to compensate for their losses. The lenders, in this instance, must rely on your word and creditworthiness to repay the loan. As a result, they can be a bit more difficult to get approved for. There are some easy personal loans to apply for, however, that don’t have many eligibility requirements and only demand that you have verifiable income and a checking or savings account in good standing.
Keep in mind, however, that you’ll likely get approved for a lot less than a secured loan because the lender is taking a bigger risk that you’ll repay it on time. Failure to repay could result in collection activities that can include lawsuits, wage garnishments, federal income tax withholdings, and more.
Which is Right for You?
Determining whether you should apply for a secured or unsecured loan will depend upon a few factors:
- Your credit history
- Your ability to repay
- What you’re trying to obtain (cash, a house, a car, etc)
- How much money you need
- Whether or not you have collateral
- Interest rates and fees
- The lender you choose to apply with
When applying for a loan, whether secured or unsecured, it is imperative to be a responsible borrower. While one may appear to have harsher consequences than the other if you don’t repay, they can both reflect negatively on your credit report and make it difficult to borrow funds in the future. Therefore, it is wise to only borrow what you can afford and stick to your agreement to repay to avoid any negative consequences. Hopefully, this has given you some good insight and you’re able to make a more informed decision on which lending product is best suited for your current circumstances.