Courtesy: Medium
| Secured Loan | Unsecured Loan |
| Requires a collateral | Does not require any security |
| Lenders can offer a large amount | Lenders offer a lower amount |
| Takes time to process | It is processed fast |
| Less risky to the lender and borrower | Riskier to the lender and the borrower |
| Long repayment period | The repayment period is usually short |
| Collateral is the primary factor of consideration | Lenders consider your credit score as the primary factor |
When deciding to take a loan, the decision between taking an unsecured loan or a secured one is not easy. You must first make up your mind on why you need a loan in the first place and how much to borrow. Follow this with the decision between these two types of loans that have their benefits but carry a certain amount of risk as well. A secured loan is basically a debt that you borrow against a certain asset that you offer the lender as collateral. It has to be something of value like your home or a piece of land or even the business you run.
You should hand over the asset you offer as collateral to the lender in exchange for the amount of loan applied. In case you default on the loan, then the lender takes over ownership of the asset and sells it off to get back the borrowed funds. You must agree to these terms before the lender can approve the loan. Many people opt for the secured loan because you can access a significant amount of money. In case you can’t pay it back, you have the asset for the lender.
An unsecured loan, on the other hand, is one that doesn’t require any collateral offered to the lender to get it approved. You should have a good credit score and apply for the loan. Due to high competition, loan rates have become quite competitive with interest charged starting from as low as 5%. One downside to an unsecured loan is you can’t get a high limit for it. The highest amount you can borrow is about $100000 with many lenders offering $50000 and lower amounts.
With an unsecured loan, you can handle any emergency that requires a fast cash injection. Secured loans take more time to process as evaluation of the asset(s) and proper valuation should be conducted before it’s approved. This takes time from start to finish making it not the ideal type of loan for an emergency.
Unsecured Loan vs. Secured Loan
The two are types of loans are different from each other. You must understand both before choosing one. Before making a decision on which one to opt for, you should evaluate why you need the loan and how much to get. A secured loan takes longer to process but is easy to get from any lender. Do you require a loan urgently? Here are the top unsecured loans.
Since you offer a valuable asset as collateral then there is no reason for the lender to deny your loan request. The problem comes when the valuation shows the asset has a lower value which means you end up with less money than you’d applied for.
The other factor to keep in mind about secured loans is that they have low interest rates. The lender incurs little risk when lending you the money. You should have an asset as collateral in case you default on the loan. An unsecured loan is riskier to the lender. All they have is your credit score to go with and no collateral to attach to the loan. This is why personal loans are charged higher interest rates.
Unsecured loans are smaller as compared to secured loans. A valuable asset offered as collateral gets you a larger loan from the lender. Since you offer the lender nothing for the unsecured loan, you get what they offer which is normally a limited amount.
Secured Loan
A secured loan is a better option even though you stand the risk of losing your asset if you default on the loan. Yes, it takes longer to process but comes in handy for a long term project. The payment period is also longer. With a secured loan, you rest easy knowing in case of anything, you have the loan covered. Unforeseen circumstances can come later on and affect your ability to make payment. The lender simply takes possession of the asset and clears the loan. This is still risky if the asset offered is your home because you might end up homeless.
Still, a secured loan gets you a higher limit than an unsecured one. With more money, you can handle a bigger and better project than when you take a small unsecured loan. Think of a secured loan when it’s not an emergency. Don’t take any of these loans when you don’t have a clear objective because you may end up blowing the money and still must pay it back.
Example of a secured loan is mortgage. You pay back monthly installments to the lender. Others are HELOCs and auto loans.
Unsecured Loans
No asset is required to get this loan but that limits the amount the lender can offer you. You can’t use this type of loan to handle big projects that require a large capital injection. This is a risk taken by lenders. They should evaluate your creditworthiness before giving it to you. With a poor credit score, no lender can give you an unsecured loan. Even if you get one, the interest rate charged is quite high. For the lender to give you a secured loan they evaluate your capacity to pay it back. It can also affect your credit score adversely in case of delayed payment or default.
People working for the government like civil servants, get personal loans fast and for a larger amount as compared to the rest of the population. Lenders consider them to have lower risk and better ability to pay back an unsecured loan.
Conclusion
The two loans serve a purpose but first decide why you need the loan before choosing one. A secured loan gets you more money but with the risk of losing your asset in case you default on the loan. The interest charged is lower as compared to unsecured loans. Unsecured loans, on the other hand, are processed faster when you meet the lender’s criteria. The downside is you get a smaller limit that may not suit a big project. Therefore, it is not easy to settle the debate of secured vs. unsecured loans and say one is better than the other.