Secured vs Unsecured Loan: What's the Difference?
Secured loans are backed by collateral and tend to have lower interest rates, higher borrowing limits and fewer restrictions than unsecured loans.
For borrowers with faulty credit, it can be easier to get approved for a secured loan.
Examples of unsecured and secured loans:
- Car loans and mortgages are common examples of secured loans, where the valuable item becomes collateral for the lender.
- Student loans, personal loans and credit card purchases are common examples of unsecured loans.
Which loan type is right for you?
Which type of loan is better for you is determined in large part by lenders and the reason you need the loan. And that leads us to the main advantages and disadvantages of secured and unsecured loans. A benefit of secured loans can be that if you have a weak or unproven credit history, secured loans can be easier to qualify for since they mitigate the risk for your lender. The arrangement also provides another benefit: secured loans can have lower interest rates than unsecured loans. If you’re in a position to repay your loan so you don’t lose your collateral, a secured loan can be a money saver.
Learn more about the potential benefits of personal loans.
What happens if you can't pay back the loan for unsecured and secured loans?
One of the drawbacks of a secured loan is that if you have trouble paying back your secured loan, the lender may take the collateral you put up for the loan. For example, a car may be re-possessed if the loan payments are not made on a timely basis. When you have trouble repaying an unsecured loan, you run into higher interest rates and fees that make repayment even more difficult. Lenders typically give you warnings and time to pay or options for special plans. It’s important to communicate with your lender about issues you are having or contact a reputable credit counseling agency for help.
How can you qualify for a personal loan?
Different lenders have different requirements for loan qualifications, Generally, those qualifications include a mix of the same factors: your credit history and credit score, income and your ratio of debt to income. When they review this information, lenders are trying to determine whether you’ll be able to repay the money they lend you. Seeing how much you have to cover your monthly expenses helps them get a clear understanding of your financial picture. When you’re applying for a secured loan, your lender will also want to confirm the value, condition and ownership of your collateral.
What is the difference in interest rates for secured vs. unsecured loans?
Interest loan rates are based on a variety of factors, and one of them is risk to the lender. In a higher risk loan, the lender may charge a higher interest rate, and in lower risk loans the interest rate may be lower. For this reason, you’ll typically see that secured personal loans have lower interest rates than unsecured loans. Secured loans are less risky to lenders, who know that borrowers are more likely to stick to the payment agreement when there is collateral at stake.
Find out more about KeyBank loans and loan rates.