Unsecured Loan versus Secured Loan: What’s the Difference?

What Makes a Loan Secured and Unsecured?

If you have looked for a loan, you may have seen the terms secured and unsecured referring to different types of loans. What do these terms mean exactly in this context? It boils down to whether or not the loan has collateral attached to it, thus securing it. Collateral is some kind of asset used to provide extra protection for the lender when you take on debt. Generally, the lender now has a claim on, or can seize, whatever you used as collateral in case you default on payment. So the difference between secured and unsecured debt is whether the loan is secured by collateral or not.

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While that is the key factor that marks the distinction between these two classifications of loans, what else makes them different and why might you want one over the other? That and more will be explained in detail in today’s post. Here at Max Cash, we strive to provide you with the most accurate and up-to-date information. Read on to find out all the important information on secured and unsecured loans.

What Can You Expect from a Secured or Unsecured Loan?

Now that the difference between the two is clear, why does it matter? A secured loan will typically have either a lower interest rate or better repayment terms (or both, in many cases) than an equivalent unsecured loan. The value of the collateral ensures that the lender has something in case of default and this enables them to offer these incentives.

On the other hand, if you don’t put up an asset as collateral, the lender has nothing to seize in case of default. They can either take you to court or send the debt to collections. The consequences of default can remain severe even without losing something of value, however. So do your best to not borrow more than you need and can afford, particularly with an unsecured loan.

A secured loan generally comes with better interest rates and terms than an unsecured loan. An unsecured loan almost entirely relies upon your credit rating for qualifying and setting the terms of the loan. But it doesn’t require putting up anything as collateral, and therefore you won’t have anything seized in case of default.

Which Loan Would Work Better for You?

This depends entirely on your personal circumstances and why you need a loan in the first place. It also depends on whether you have and want to put up anything as collateral as well. Your credit score will also determine what makes a better option or an option at all. You need a fairly high score to qualify for a lot of unsecured loans, depending on the lender, of course.

If you have good credit, then an unsecured loan may be the most reasonable option. The most common unsecured loan is a personal loan, as it is not for anything specific like an auto loan or mortgage, so collateral is not required to guarantee the loan. You can get personal loans from a variety of lenders, like traditional banks or online lenders as well. A cash advance from a credit card works in much the same way as a personal loan, though the interest rates generally prove prohibitive and more than the rates on a loan. Though that depends on your credit and the specific credit card provider.

Whether you have good credit or not, a secured loan is generally a good option too, if not the only option for some loans. Obviously, a home or auto loan will be secured by the house or car you are buying with it. You can also secure a loan with the equity in a home or car, like a title loan or a home equity loan. A valuable object can also work as collateral for a loan to secure it, like a valuable painting or piece of jewelry. A title loan is obviously a secured loan, as the vehicle title works as the collateral in that case.

Understanding the Difference Between Secured and Unsecured Loans

Now that you know what makes them different and the different features you can expect from both, you are better equipped to choose a  loan product that fits your needs. Educating yourself and knowing more about the financial world and how various products work is the best way to prepare yourself for a brighter financial future. Come back to Max Cash to stay up to date on all of the best information in the financial education space.

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By Jordan Radcliff

Jordan is a writer for Max Cash who covers a wide range of topics, including personal loans, credit scores, and side hustles.