Secured Loan vs. Unsecured Loan: The Pros and Cons

Secured vs Unsecured loansUnsecured loans are not easy to get but not impossible.  This type loan is when you don’t need any type of collateral fo
r your loan.  This has a lower risk level than a secured loan for the borrower. Before you go out and get one, you need to understand why they’re good and also why they’re bad so you don’t get snagged into a bad deal.

Why are Unsecured Loans Beneficial?

Anyone can borrow with this type of loan, whether you’re a homeowner or a renting tenant. No collateral is needed so if you’re renting, you don’t have any property you can use for this purpose. If you do have a house, then you don’t have to take the risk of losing it in case you can’t pay back the loan due to various reasons. You’re protected and your assets will be safe in your hands.

The loan application and approval process is quicker than a secured loan because the asset does not need appraisal.  This is one long process that’s eliminated with this type of borrowing arrangement. There isn’t any title involved like with a car or your home. In some cases, you can be approved and get the funds the same day.  Payday loans and personal loans can be considered as unsecured loans.

Why Unsecured Loans are Not the Best Option

When it comes to the interest rate, you may wind up paying a higher APR.  Your installment payments will be higher since the creditor is loaning money based on the trust factor.  The risk for the lender is higher so your costs are higher. This will most likely be the case if your credit rating is lower but if it is higher, you may not experience this issue.

Getting the full amount of the loan you need may be difficult.  You won’t be able to get a lot of money because of the risks that this poses to the lender. Most lenders have a limit that can be borrowed with this type of loan. If you need $100,000, you may only get $25,000 depend on who you apply for a loan with. Other lenders may only lend $50,000 and the amounts will vary from one creditor to another.

You don’t have flexibility with unsecured loan and you may repay the amount borrowed in a set amount of time.  A good example is a car loan where you pay $400 over a period of 60 months.  Payments will not change so you won’t be able to get this figure down and you may or may not have a fine for early payoff depending on your loan term.

Benefits of Secured Loans

It’s not easy getting a loan these days, and when you do find a lender willing to work with you, you may have to present some type of collateral. Requirements are constantly changing and lenders need to do what it takes to prevent loss. Some type of collateral may help you qualify for borrowing funds. Even though it’s harder, you can still get this type of loan. Secured loans decrease the risks that a creditor has.

Lower interest rates are common with secured loans and this makes it a more affordable repayment solution. Your monthly installment will be lower than a monthly payment with an unsecured loan because you’re using a “cushion” for this benefit.

Compared to an unsecured loan, you have more time to repay the loan and you have more flexibility to try and reduce the amount you pay per month. With a lower payment negotiated, you may be able to comfortably afford this type of loan even if you have other financial and personal obligations to fulfill.

With a secured loan, the amount of the loan you can get may be higher because of the collateral used.  When you opt for an unsecured loan, the dollar amount is limited.  Don’t think that with a secured loan the amount you can borrow is unlimited, because it’s not.  You just have a little more flexibility to get a little bit more if you need it.

If you have poor credit, you can find a secured loan.  Because of the collateral, lenders may be a little bit more lenient because they have protection against default.  Even though you’ll need collateral, you need to weight things carefully.

Disadvantages of Secured Loans

The lender will tell you what collateral is required to get the loan.  They may ask you to use your home, car or anything else you own that has a significant value, even if it’s worth more than the loan.  This is the reason why you need to consider this option carefully before you sign the loan papers for a secure loan.

If you default or fail to pay, the lender has the right to stake his or her claim on the collateral.  It can be repossessed at any time so the creditor does not incur a loss.  If you don’t pay, you’ll lose your collateral.

Because of the extended amount of time you have to pay back your loan, you’ll be debt for a longer amount of time. It will take much longer to put a dent in the balance or even pay it off completely.

Selecting the Right Type of Loan

First decide if you will be able to fit the repayment amount and schedule into your budget. If you can’t squeeze it and you’ll hurt your financial condition, don’t get the loan.  When the repayment amount comfortably fits in, it means you can afford the repayment.

Also look at the terms.  These must be disclosed to you before you get a loan.  It must be clear and don’t sign if you have unanswered questions or anything is not clear to you.

Do some research on the lender mainly regarding feedback.  There are some who may take you for a ride so do some homework first to protect yourself and stop a headache from forming later.

You also need to see if you really need a loan and if the purpose is really worth borrowing for.  Sometimes people take out loans only for luxuries.  Is this what you’re doing?  Is the purpose a necessity? The answer to these questions depends on the purpose.  If you need the money for medical bills, then we would say it is needed.  What about a family vacation?  This is just a luxury so you probably won’t need the money right away.

Take a look at your circumstances and then decide which one is best for you.

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