It would be amazing if we always had the money we needed in our own back pockets. Unfortunately, more often than not, this is not the case. Many American families live paycheck to paycheck, which means big purchases or investments might require the assistance of a loan lender.
Any sort of borrowing from a financial institution is considered a loan. But there are many different kinds of loans and it’s important to understand the distinction between them. For example, there are both secured and unsecured loans available from most institutions.
What is the difference between a secured and unsecured loan? Read on and we’ll walk you through everything you need to know.
What Is A Secured Loan?
People take out loans for many reasons. You might be opening a new business, paying off a large purchase, or simply need a little extra cash to help keep your head above water. If you’re hoping to use a loan to pay off a big purchase, you should read more about how to do such a plan responsibly.
Lending money out to people is inherently a risky proposition, and lending financial institutions understand this. Their main goal is to ensure that they see the money they lend you come back to them (with a little extra interest, of course).
As such, they’ll take steps to protect themselves. This often includes a lengthy and detailed application process, meant to determine how reliable you are as a money borrower. They’ll look at your credit score, your employment history, your bank account, and other such areas to determine how easy it would be for you to pay them back.
In some instances, you might be considered too risky to be approved for a loan. But that’s where a secured loan can come in: you can take steps to help assure the money borrower that they’ll see their money back.
How? By offering one or more of your assets as collateral. A secured loan is known as ‘secured’ because you are offering something in return for the money lent. This asset that you’re borrowing against could be your home, your automobile, or any other item you own that is high in value.
If you fail to pay the moneylender back on time, they have the option to seize the asset you put up as collateral. This helps the lender ensure that they won’t be left in the red. While this increases the risk for you as a borrower, it can be a big help in securing a loan that you might not get otherwise.
Just make sure you can pay it back on time!
What Is An Unsecured Loan?
There are some situations where a secured loan isn’t necessary. There are instances where a money lender will give a loan without needing to see one of your assets put up as collateral.
This might be because your application makes you seem very likely to make your payments on time. A person with a strong credit score and a history of borrowing might be able to get an unsecured loan. This is especially true if they have evidence of a very large income.
There are certain kinds of loans, like student loans of personal loans, that are always offered as unsecured loans. No former student is getting their car seized because they can’t pay off this month’s portion of their student loans.
Unsecured loans are obviously preferable to the borrower if they’re able to obtain one. They offer less risk to the borrower.
Why Go With A Secured Loan?
With the amount of risk involved, why does anyone spring for a secured loan?
As we discussed, in some instances a secured loan is the only way one can ensure that they will get the money they need. For those with poor credit scores or low income, a secured loan is the best way to help assure a money lender that they will see the funds back. Simply go to this website if you want to borrow money online
But that’s not the only reason that an individual might decide that a secured loan was desirable for their situation. It’s much easier to secure a higher loan amount in a secured loan than it is with an unsecured loan.
Even if you have a strong credit score, a money lender might cap the loan their willing to give you at a certain amount. Offering collateral can help loosen them up and allow them to loan you a larger amount of money.
There are also some types of loans that are almost always required to be secure. Mortgages and auto loans, for example, are given only on the understanding that the asset in question can be seized if payments fall too far behind.
Secured loans also typically have lower interest rates than secured loans. This isn’t always true, but generally speaking, you might be able to save some money by going with a secured loan. In many instances, the APR for a secured loan is nearly half of what is asked for an unsecured loan.
No matter which type of loan you go with, it’s a good idea to try and polish up your credit score before visiting a financial institution. Putting your best foot forward can help to get you the best deal possible when it comes to borrowing money.
Secured and Unsecured Loan Differences
If you need to borrow money for your work or personal life, it’s important that you understand the distinction between a secured and unsecured loan. Depending on your specific circumstance, one might be better for you to apply for.
Need more financial advice? Check out our blog for more.