If you’re in the market for a personal loan to finance your next big purchase or one of life’s unexpected expenditures, you may have come across the terms “secured” and “unsecured” in your search for the perfect lender. There are a few differences between secured and unsecured personal loans, each with their own benefits and disadvantages, depending on your situation and needs.
Secured Personal Loans
Unsecured Personal Loans
The main difference between secured and unsecured loans is that secured loans require collateral. Because lenders of secured loans have an asset to seize if you default on your payments, they are typically able to offer relatively favorable interest rates and lines of credit, and are willing to lend to individuals with less-than-stellar credit scores. In contrast, because lenders of unsecured loans assume a higher risk by lending to borrowers with no collateral, they often protect themselves against potential losses by offering higher interest rates and lower credit lines.
Because of the collateral requirement for secured loans, it typically takes longer for the lender to disburse funds, although the amount which you are able to borrow will generally be greater than that of an unsecured loan, which is usually available within a few business days.
Another important difference between secured and unsecured loans is the flexibility with which you can use your borrowed funds. Secured loans are typically disbursed for specific purposes like the purchase of a home, car, or boat (mortgages and auto loans are examples of secured loans), whereas unsecured personal loans can be used to pay off debts, medical bills, home improvements, or stashed away in an emergency fund (credit cards are the most common type of unsecured loan).
Which Type of Personal Loan Should You Choose?
Like most decisions, the type of loan you ultimately choose depends on your specific circumstances. A few questions to ask yourself before deciding which type of loan to pursue:
For individuals with a strong credit score and a stable income who require smaller, but immediate funding, an unsecured loan may be the preferred route. For those with lesser credit who are seeking a larger cash infusion for a specific expense, a secured loan may be the better option.
Get answers to more of your questions about personal loans by visiting our Personal Loan FAQ.
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