When shopping for a loan, there are many options available to you, including whether to obtain a secured or an unsecured loan. Understanding these types of loans in more detail can help you borrow money wisely.
What is a Secured Loan?
Lenders often issue loans secured by a specific item of personal property. This item might be a house, a car, a boat, or even stocks or bonds. When property is used to secure a loan, the lender maintains ownership rights in the asset until the loan gets repaid.
The most common type of secured loan is a mortgage, which is secured by the house being purchased. If you stop making your mortgage payments, your lender could foreclose on the home and sell it to pay off the mortgage. If you sell your home, you must pay off your mortgage immediately.
- You can borrow larger amounts because lenders are confident that they will get their money back.
- Typically come with a lower interest rate than unsecured loans because the lender is taking on less financial risk.
- Some types of secured loans allow tax deductions for the interest paid on the loan. Consult with your tax advisor.
- The personal property named as security on the loan is at risk. If you can’t repay the loan, the lender could seize the property.
- Typically, the amount borrowed can only be used to purchase a specific asset, like a home or a car. Home equity lines of credit are an exception.
What is an Unsecured Loan?
An unsecured loan does not involve naming any specific property as collateral on the loan. Instead, the loan is issued on the basis of your ability to repay the loan. You might have to provide information about your income, savings, employment, or credit history. Some common types of unsecured loans include credit cards, student loans, and personal loans.
Advantages of Unsecured Loans
- You may be eligible to get an unsecured loan without having to put up collateral.
- The application process for an unsecured loan often goes much quicker
Disadvantages of Unsecured Loans
- Typically, interest rates on unsecured loans are higher than rates on secured loans.
- Unsecured loans may be difficult to obtain if you do not have positive credit history or don’t have a regular income. You may still be eligible by having a co-signer with good credit history to sign the loan documents with you.