The Difference Between Secured and Unsecured Loans:

Get the most out of your loan

If you are looking to borrow money, it is important to know your options and what it might take to qualify for a loan. Lenders will offer loans that are referred to as secured or unsecured. Secured loans generally offer lower rates and can be had by those with lower credit scores. Unsecured loans generally come with higher rates and require borrowers to have higher credit scores.

What are some other differences to consider?

Secured Loan vs. Unsecured Loan

What's a Secured Loan?

A secured loan is a loan that is secured with collateral. For instance, when you buy a car, the vehicle is collateral that guarantees the auto loan until it is repaid. If the loan is not repaid, the car is repossessed and sold at auction. A mortgage is also considered a secured loan because the home is used as collateral until the loan is repaid. Any loan is a secured loan if you decide to put up collateral, and collateral can be anything of value that a lender can liquidate to recover his or her money in the event of a nonpayment.

What's an Unsecured Loan?

An unsecured loan is any loan that is not secured with collateral. In such a scenario, the lender's only guarantee of repayment is your word that you will do so. This is why you usually need better credit to get the best unsecured loan rates. However, lenders may also be able to seize assets as part of a legal judgment against you if you fail to repay. An example of an unsecured loan would be a credit card or a personal loan.

unsecured loan

Converting Secured Loans to Unsecured Loans

Depending on your situation, a secured loan may be converted to an unsecured loan. For instance, after you go through a bankruptcy, your only option to borrow money may be to open a secured credit card. However, if you make the monthly payments on time, it may be converted to an unsecured credit card. You may also be entitled to your security deposit back plus interest. You may also be able to convert an unsecured loan to a secured loan by working with your lender to either refinance the loan or convert it through the use of collateral.

Borrowing money may make it possible to make a large purchase, get out of a financial jam or allow you to expand your company. However, make sure that you know what you are getting yourself into ahead of time to ensure that you know what's on the line if you fail to repay your loan in full.

When a Secured Loan Makes Sense

Secured loans are good options for those who want to pay the lowest rates or get other favorable loan terms. Although you risk losing your collateral if you can't pay, getting a lower interest rate or longer loan term means that your monthly payment stays at an affordable level. In some cases, you want to secure a loan with collateral even if you have good credit as you may save money in the long run.

When an Unsecured Loan Makes Sense

Unsecured loans make sense if you don't have collateral to put up or you don't want to risk losing your home or car in the event you can't repay the loan. For instance, you may want to take out a business line of credit without possibly putting your family at risk if the company goes under. While you will pay a higher interest rate, some lenders offer introductory interest rates or other terms that make it easy to keep your balances in check.

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