When comparing secured loans and unsecured personal loans, look at the pros, cons, risks and benefits of each loan. You’ll also want to consider how your financial needs, situation and personal goals might work. Understanding the difference between these two types of loans is important, because you can make the best financial decision before borrowing money.
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How to get the best loan rate.
What is a secured loan?
A secured loan is one that is backed by collateral using your property. You can use your home, car or other piece of property you already own as collateral against your loan. If you default on the loan (meaning you don’t pay it back), the lender, usually a financial institution, can take the property you put up as collateral.
This collateral reduces the risk that the bank or other lender will lose the money, meaning you can borrow a larger amount of money over a longer period of time, often at a lower interest rate, than you could with an unsecured loan. This is because the lender does not take too much risk when lending you money.
Getting a secured loan is great for big things like home renovations, a vacation (but we recommend saving for that), a wedding, and consolidating high-interest debt like credit cards. A secured loan can be used for post-secondary education if you do not qualify for a student loan. A car loan is one example of a secured loan—the car is the collateral.
What is an unsecured loan?
On the other hand, an unsecured loan does not require collateral. There is a lot of risk for lenders because there is no guarantee that they will get their money back, so loan rates tend to be low and interest rates tend to be high. These loans are best reserved for expenses such as emergency home repairs. Payday loans are unsecured loans as there is no collateral and high interest rate.
If done wisely, an unsecured personal loan can help you save money. If you have a credit card (unsecured loan) with a high interest rate (22.99%!), a personal loan can help you pay off that debt quickly. You will have to pay off the personal loan, of course, but the lower interest rate means you pay less on the loan over time.
Pros and cons of secured loans
Like all loans, secured loans have advantages and disadvantages.
Benefits
The benefits of a secured loan are:
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