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Which is better: Secured or Unsecured Loans?


If you’re looking to apply for a personal loan, there are two major categories to choose from. Most if not all loan types belong into these two categories. Each category obviously has its set of advantages and disadvantages. In most cases, you might find yourself asking which of the two categories is better for your needs. This quick guide was created exactly to help you choose between secured and unsecured loan types.




What are secured loans?

Secured loans, as you can glean, from its name are loans that require an asset, security or collateral. In other words, you’ll only be qualified to apply for the loan if you have a car, home and other acceptable asset to secure the loan with. Examples of secured loans are mortgage, home equity line of credit, auto loan and logbook loan among other loan types.

With a security involved, it means that you can borrow a larger amount with secured loans. This category therefore is best for borrowers who are looking to borrow larger loan amounts for major expenses and investments. The loan offer will usually depend on the value of your asset or security and on your steady income.

On the downside, secured loans are also quite risky. Though the interest rates may be lower than unsecured loans, the risks are higher for borrowers because of the risks of asset repossession. If the borrower is unable to repay the loan, the lender can recover your asset as agreed upon through the loan terms. The lender can also sell off the asset to pay off your outstanding loan balance.

What are unsecured loans?

Unsecured loans, on one hand, are loan types that require no asset or security. It is exactly the opposite of secured loans. With no security your lender can repossess in case of nonpayment, lenders can only lend borrowers smaller loan amounts often at higher interest rates than secured loans. Examples of unsecured loan types include payday loans, credit cards, personal loans of credit and signature loans among other loan types.

With unsecured loans, the basis for approval often depends on your financial capability to repay the loan. The most important requirement you’ll have to prepare is your proof of income. So long as you have a steady stream income to prove of your financial capability, loan approval is often fast and easy.

With no security needed, unsecured loans are also perfect for borrowers with bad credit problems. Lenders do not run credit checks on applicants hence the fast approval. You’ll really just need to meet the eligibility criteria and you’re ready to get approved. Just remember that the loan offers are smaller so unsecured loans are only ideal for pressing financial emergencies such as rent, car repair, overdue bills, etc.

Which is better?

Between the two loan type categories, the question shouldn’t be which category is better but rather which one is right for you. As you can see, both secured and unsecured loan types have pros and cons to consider. Like with any important financial decisions, the trick is to opt for a loan type that suits both your needs and financial capability.

As a simple guide, keep in mind that secured loans are ideal if you have a security you can use to avail a larger loan amount. Interest rate is usually lower but the risks are higher in terms of repossession. Conversely, unsecured loans are ideal if you need a quick fix solution to unexpected financial emergencies. Interest rates may be higher but approval is always quick and easy.