Considering A Better Option For A Secured Or Unsecured Loan

What reason are you applying for a loan? Possibly want to fund a vacation, medical bill, or even a small startup. Whatever the reason, you need to figure out what type of loan to get so you don’t end up in debt. This is where secured and unsecured loans come in. 


The major difference between these two is that the former requires collateral in exchange for money, and the latter is free. Some lenders categorize loan amounts as secured and unsecured. For example, a loan below $2,000 is unsecured because it is small and the repayment terms are short. 


As the loan amount increases, so do the terms in years and interest rate. This is why the loan is secured. The lender uses the collateral as security, so your asset will be seized if you fail to pay the loan. Now that you know the primary difference between these two loan types, let’s take a look at some other factors:


Secured Loan


You can easily qualify for a secured loa n because of the collateral. The lender will consider your credit history, income, and debts. As for the credit score, it is not a deciding factor because of the collateral.


A secured loan has a low APR interest rate and is usually based on the value of your collateral. You can opt for monthly payments with either a fixed or variable interest rate, for a secured loan. 


Getting a secured loan is riskier because it impacts you on two levels. If you fail to pay the loan, your credit score will suffer, and you will lose the collateral.


Types of Secured Loans


  • Mortgages

  • Secured Credit Cards

  • Vehicle Loans


Pros and Cons Of Secured Loans




  • Lower interest rates.

  • Less strict eligibility requirements.

  • Higher borrowing limits.




  • A missed payment can damage your credit score.

  • Collateral can be seized if you default on the loan.


Unsecured Loan


The eligibility for an unsecured loan requires the lender to pay extra attention to your credit score and history to ensure you can repay the loan. The lower the credit score, the higher the chances of rejection.


The interest rate for an unsecured loan has a high APR, usually between 6% and 36%. Standard monthly payments for an unsecured loan are fixed for a period of 2-7 seven years. 


Compared to a secured loan, the risk factor of an unsecured loan is safer as it does not involve collateral. A missed payment might result in a small penalty and drop in your credit score, but nothing as drastic as your assets getting seized.


Types Of Unsecured Loans


  • Personal Loan

  • Revolving Loan

  • Student Loan



Pros and Cons of Unsecured Loans




  • No collateral required.

  • Your assets cannot be seized without a court order, giving you plenty of time to make arrangements.

  • Lower borrowing limits allow you to spend wisely.




  • High-interest rate.

  • You might not qualify if you have a low credit score.

  • If you default on the loan, your credit score will fall further.


Depending on your financial status, either of the loans can work out for you. If you have a strong credit score and know you can make monthly payments on time, opt for a secured loan. If you are in a difficult situation and your credit score is low, browse lenders and opt for the one offering a low-interest rate.

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