Loan Express does not require credit checks, decline a loan based off a credit check, nor do credit checks affect the minimum approved amount of the loan. The following article is purely for educational purposes.
People seek out loans for various reasons, whether to pay off debts or help fund a family vacation. However, knowing the different types of loans available to you should not be complicated. Loan Express is here to help explain the difference between secured and unsecured loans so you can make the right choice for your situation and get on the path to financial stability!
A secured loan allows you to borrow more money with less interest but perhaps more collateral. The application process can be lengthy, and the collateral needs to be verified, such as a home appraisal or car inspection. This is not ideal for situations where you need quick money.
An unsecured loan has no collateral involved, meaning they have higher interest rates but can be available much quicker. You will also come across shorter loan terms and a cap on how much you can borrow, making this type of loan ideal for personal payday loans or credit cards.
What is a Personal Loan?
A personal loan is based on your credit score, income, and the debt you have acquired during your financial life. Personal loans can be as little as $500 or as much as $50,000 – you will be provided with a lump sum by your loan provider which you will have to repay in installments over a specific term.
What is a Secured Personal Loan?
A secured personal loan would fall under the category of something like a mortgage. When you decide to take out a mortgage to buy a house, you secure the money you borrow with the new home (collateral). Once you pay off your personal loan, you own the collateral associated with it. People often choose secure personal loans to access lower interest rates and higher borrowing amounts with long repayment periods to make big financial steps.
Types of Secured Loans
Some of the most common types of secured loans include:
- Mortgages. The home you’re borrowing money for, usually in the form of a mortgage, acts as collateral for your loan. You will be provided with a lump sum payment that you pay back over a period of time. Once paid off, you own the home.
- Car loans. Auto loans are used to finance collateral like a vehicle you want to own instead of a lease. The average car loan interest rate is around 5%, and you must repay your loan over a specific time period. Your car can be repossessed if you do not repay the loan in time.
- Home equity. If you have accumulated a certain amount of equity after owning your home for a while, you can borrow against the equity through a home equity loan or line of credit. This means you can borrow a percentage of your home’s value to subtract from what you owe on your current balance.
- Personal loans. Although personal loans are usually unsecured, you can collateralize them by securing them with collateral, helping lower your interest rate and qualify for a higher loan amount.
- Credit cards. If you cannot obtain a traditional credit card, you may find it easier to get a secured credit card. You just need to provide a minimum security deposit acting as your credit limit, meaning you’re spending money you already have.
What is an Unsecured Personal Loan?
An unsecured personal loan typically comes in the form of a smaller amount of money that you need to pay back in a shorter amount of time. Banks, credit unions, and payday lenders offer these types of loans. The amount you receive is often based on your credit score, income, and the amount of debt you have.
Types of Unsecured Loans
Some of the most common types of unsecured personal loans include:
- Personal loans. Also known as payday loans, the loan amount you are given is based on your credit score, income, and the amount of debt you have acquired. You will be provided with a lump sum that you need to pay back in a matter of months, with varying interest rates.
- Credit cards. By owning a credit card, you are able to spend within its limit every month – but you must pay back at least the minimum amount monthly or interest will begin to accumulate. Credit cards often involve “revolving loans”, meaning the credit limit can be spent, repaid, and spent again.
Difference Between Secured and Unsecured Loans
The main difference between secured and unsecured loans is the use of collateral in the loan. A secured loan is for larger purchases, such as a home or a car. The item in question is used as collateral until you pay off your loan and interest over a certain period of time and then own the item.
An unsecured loan is for smaller lending purposes, such as paying off debts or funding a vacation. There is often no collateral involved; all you require is a credit check and proof of income.
Benefits of Secured Loans
Some benefits of secured loans include:
- Qualification is easier. With an asset as your collateral, this minimizes the lender’s risk. You can even qualify for a secured loan with a low credit score.
- You receive a larger amount. The collateral backing your loan means you will also be approved for a higher loan because the lender has a lower risk supporting you.
- Lower interest rates. The reduced risk and the large cost associated with your collateral means you have a longer time period to pay it off, making your loan more affordable.
Drawbacks of Secured Loans
Some drawbacks of secured loans include:
- Risk of lost collateral. Since secured loans require collateral to reduce the lender’s risk, they may repossess your assets and sell it if you fail to make your payments. They then sell the collateral to recoup their losses.
- Less flexibility. Secured loans finance a specific purpose, such as buying a home or car with the intention to own. If you want to use the loaned money for other purposes, you will need to look into unsecured personal loans.
Benefits of Unsecured Loans
Some benefits of unsecured loans include:
- Flexibility. With an unsecured loan, you can borrow the funds for a variety of purposes.
- Low risk. If you do not make your loan payments, you will not lose anything other than more money due to interest. All assets you own are yours.
Drawbacks of Unsecured Loans
Some drawbacks of unsecured loans include:
- Often difficult to qualify for. Without collateral for support, you may need good credit and a solid income to prove you are a good candidate for a loan.
- Expensive. Unsecured loans come with higher interest rates than secured loans, meaning if you do not pay back the loan in time, you will end up paying more.
Which is Better: Secured Loans or Unsecured Loans?
To determine whether a secured loan or an unsecured loan is better for you, you need to assess your particular situation, individual needs, and what you are putting the money towards.
An unsecured loan might be best if you have good credit, need financial flexibility and freedom to spend on what you want, and don’t want to put any collateral you own at risk. A secured loan is good for you if you need a large amount of money to put towards owning an asset, have a lower credit score, want a lower interest rate, and are investing in a car or house.
Why Choose Loan Express for a Personal Loan?
Despite what we’ve talked about in terms of the conditions of unsecured personal loans, Loan Express stands out from the rest. You can receive the flexibility and low risk of an unsecured personal loan without the requirement of having good credit, a steady income, or any other financial proof. We accept the vast majority of applicants and make it as easy as possible for you to achieve financial freedom. Receive a loan from Loan Express today.
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