Types of Loans: Secured vs. Unsecured

Secured and Unsecured Loans: What is the Difference?

When borrowing money, it is important to know the difference between a secured and unsecured loan to help one make wise financial choices. These two have different uses and they are associated with varying risks and advantages.

Secured Loans

A secured loan is an asset-based loan that is secured, usually by collateral, against a specific asset--a car, house, or savings account. This implies that in case you default on a loan repayment; the lender has the right to reclaim the money by taking possession of the collateral.

Typical secured loans are:

Backed by your home

Secured car loans (car secured by financial institution)

H. noticed!

Since they are less risky to lenders, secured loans have a lower rate of interest and much higher limits on the amount that can be borrowed. But the costs to the borrower are higher--delinquency may mean forfeiture of property.

Unsecured Loans

A loan that is unsecured requires no collateral. Instead, your lenders consider your credit worthiness, income and repayment performance.

Examples include:

Personal loans

Credit cards

Student loans

As there is no collateral, such lending is riskier to the lender which usually means higher interest costs and more restrictive lending rules. Not paying an unsecured loan would not make you lose a house or a car, but it can hurt your credit rating, put you into collections, or legal problems.

Which of the Two Suits You?

Whether to take a secured or unsecured loan would depend on the financial status, credit rating and the purpose of borrowing. Secured loans might be suitable when you own valuable assets, and need a low interest rate loan. Desiring to avoid risks of losing assets, one can obtain an unsecured loan, which will provide comfort, however, at the cost.