Secured vs. Unsecured Loans: Which one is Better?

Secured vs. Unsecured Loans: Which one is Better?

Are You Better Off Getting A Secured Or Unsecured Loan? If you have certain personal emergencies that you feel you’ll need a short-term loan for, you’ll usually have several kinds of loans or lines of credit you can look into applying for. But usually loans fall into one of two categories which are secured and

Are You Better Off Getting A Secured Or Unsecured Loan?

If you have certain personal emergencies that you feel you’ll need a short-term loan for, you’ll usually have several kinds of loans or lines of credit you can look into applying for. But usually loans fall into one of two categories which are secured and unsecured loans. The question most people have is “which kind of loan is better?” The answer is that it ultimately depends on factors like how you would rate your eligibility to get a loan, how much you need to borrow, how long you need the loan for, and many other things the lender would need to consider. But first, here’s a basic understanding of the differences between the two loans.

The Simple Difference Between Secured And Unsecured Loans

Secured loans, which are also sometimes called guaranteed loans or collateral loans are called such because they use an asset or multiple assets to borrow against. The asset therefore becomes collateral. What will happen is in exchange for the loan they receive, the borrower will authorize the lender to repossess the asset if they fail to repay the loan as agreed to. Usually the asset will have high value so that the borrower can borrow a significant amount of money.

Unsecured loans in their simple definition are loans that don’t require an asset to be used as collateral from the borrower. Now they do usually come with other caveats, but in their most basic form, all the borrower needs to do is sign their name on an agreement to repay them. Maybe the idea of being able to borrow without putting an asset at risk of being lost sounds more appealing, but you may find other reasons why a secured loan could be better.

Pros And Cons Of Each Loan

Secured and unsecured loans each have strengths and weaknesses that you have to weigh when you consider them. Keep in mind though that there’s many variations of loans within each category, and there can be some exceptions to their pros and cons. But generally speaking, this is what you can expect from each of them:

Pros of Secured Loans:

  • They can be easier to qualify for because using collateral means there’s less risk the lender loses all their money if you default
  • You can sometimes borrow more than you can with unsecured loans
  • You usually don’t need to worry about your credit score or history

Cons of Secured Loans:

  • You will usually only be able to borrow up to about half of what your assets are worth
  • Usually the lender can take immediate possession of your assets if you default

Pros of Unsecured Loans:

  • You can usually use them for the same purposes as secured loans
  • In some cases, you may have more favorable repayment terms without assets at risk

Cons of Unsecured Loans:

  • You usually will have credit and income inquiries made about you to determine if you qualify
  • You may not be able to borrow as much as you would with a secured loan

Most business loans are secured loans, but when it comes to personal loans, they could be either secured or unsecured. Loans like auto loans and mortgages are secured, but smaller loans like debt consolidation loans and credit cards are unsecured, although credit cards are technically not loans but are still often mentioned in this category. However, when it comes to short-term loans, an auto title loan would be considered a secured loan while a payday or installment loan would be unsecured.

Why Auto Title Loans Can Be Good Secured Loans

With an auto title loan, you’re borrowing money using your vehicle, but you give the lender your title until you’ve repaid the loan. The more your vehicle is worth, the more you get to borrow against it. Usually you’ll borrow about 30℅ of its current market value, but in some states you may get to borrow as much as 70℅. A title loan could be anywhere from $500 to even as high as $10,000 in a few rare cases, but some states only allow borrowers to borrow up to $4,000 or $5,000 using a title loan, and some states do not allow title loan lenders to operate at all. But in states where they are legal, you usually have about 30 days or a little longer to repay your loan or pay off the interest due. If you fail to do so, the lender can repossess your vehicle, though there are sometimes laws that limit how this can be done.

Why Payday Loans And Other Small Dollar Loans Can Be Good Unsecured Loans

A payday loan is unsecured, but the lender usually runs verification checks on you to make sure you’re employed and have an active bank account so they can collect payment. You can usually get these loans very quickly because they’re usually for only about $300, and it never takes long to verify the required information. The downside to a payday loan is that it’s not only significantly less than a title loan, but you also have much less time to repay it with only about two weeks to either pay in full or roll it over. Another personal loan that can be a better alternative to a payday loan is an installment loan which can allow you to borrow a little more money, but instead of paying it off all at once you pay it off in installments over a longer period of time. As with title loan regulations, payday and installment loans are also governed by the states.

The bottom line is there really is no right or wrong answer to whether a personal short-term loan should be a secured or unsecured loan. If you’re not worried too much about your current credit score or income situation, a small unsecured loan may be the best. If you do have credit problems but have an asset like a vehicle you wouldn’t mind using to borrow against, secured loans are probably better.

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