There are two types of personal loans available in the market: unsecured and secured personal loans. A secured personal loan is backed by collateral, which means a personal asset of yours can be seized by the lender if you fail to repay the loan. An unsecured personal loan doesn’t require you to sign off any collateral.
Both kinds of personal loans have their advantages and disadvantages. But with so many options available in the market, it can be tricky to figure out what would be best for you. The best way to go about this is to learn as much as you can about both secured and unsecured loans before applying for a personal loan.
Secured loans are usually used for purchases that need larger amounts of money, like a home loan or a vehicle loan. Lenders prefer secured loans because they involve less risk for them. Some borrowers also prefer secured loans because you can get a lower interest rate on them. A good credit score, stable income, and a low debt-to-earnings ratio are some of the most important requirements for such loans.
Unsecured loans don’t require collateral and are issued based on your credit score. Because the lender is taking on a greater risk by not requesting collateral, unsecured personal loans tend to have more strict credit and income requirements compared to secured loans. Missed repayments and defaulting on unsecured loans will harm your credit score and in the worst case, your account could be submitted to a collection agency.
The difference between secured and unsecured personal loans?
There are five different aspects where secured and unsecured loans differ; collateral, interest rates, the maximum amount you can borrow, and the criteria for qualification. Let’s talk about them in detail.
The biggest difference between secured and unsecured personal loans is the collateral. With a secured loan, you are giving the lender permission to seize the asset you use as collateral in case you fail to repay the loan. With an unsecured loan, no collateral is required, but you will still face credit repercussions if you default on your loan.
2. Interest rates
There are fewer risks involved in secured loans for lenders since the borrower is putting up their asset as collateral. Hence interest rates are usually much lower as compared to unsecured loans. However, if you have a good credit score, you can still negotiate favourable interest rates for unsecured personal loans. 760 is usually considered to be a good credit score.
3. Borrowing limits
Due to the approval requirements, secured loans usually have a higher borrowing limit, which gives you access to more money. Unsecured loans will have a lower borrowing limit but some lenders may allow you to borrow a large amount depending on your finances and the reason you are taking the loan.
Are there any restrictions on how the funds can be used for unsecured loans?
Most unsecured loans have very few restrictions on how the money can be used. As long as the funds aren’t being used for gambling, illegal activities or, in some cases, college expenses, you are free to spend the money however you want.
How do you choose between them?
- Secured loans usually offer lower interest rates compared to their unsecured counterparts. If you aren’t strapped for cash, secured loans may be better for you as long as you can afford to repay it on time.
- Lenders put more emphasis on assets when it comes to secured loans. So, if you have a short credit history or average credit score, you might have an easier time with secured loans.
- Secured loans are also a good fit for self-employed borrowers or don’t have a fixed income, as the lender secures the loan with an asset rather than depending entirely on the borrower’s income.
- Secured loans take longer to process because the lender has to verify the asset and its market value first. If you are in a hurry, unsecured loans have a faster processing time.
While debating which type of personal loan would suit you, remember to check out online lenders too. They have faster processing times and some even let you prequalify for them. We hope this article helps you understand which type of loan would be better for you.