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Secured Loans vs Unsecured Loans: What You Need to Know

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Chances are that at some point or another, you’ve had to borrow money in the form of a loan (or will need to in the future). Loans can come in a variety of forms and it can be difficult to understand the differences.

The two major categories of loans people choose between are secured loans and unsecured loans. Before going out and getting yourself a loan, it is important to know the major differences between these two types of loans to determine which one best suits you.

Secured Loans

The major characteristic of secured loans is that they are backed by an asset, such as a house or a car. The asset is put up as collateral for the loan, with you agreeing that the lender can repossess it if you don’t repay the loan. With secured loans, the lender is taking on less risk because they have collateral guaranteeing them something of value should they not get paid. Because of this lower risk, the interest rates on secured loans tend to be lower. Financial institutions may allow you to borrow a larger amount over a long period of time, making the loan payments more affordable. The most common types of secured loans are housing loans and car loans.

Unsecured Loans

Unlike secured loans, unsecured loans don’t require you to offer up any assets as collateral. This can be appealing to many people looking for a loan. Because there is not collateral for an unsecured loan, they typically have higher interest rates and the amount you can borrow tends to be lower. They also tend have more criteria involved to obtain since there is nothing backing the loan. The most common types of unsecured loans are credit cards, personal lines of credit, student loans and personal loans.

Whether you are choosing a secured or unsecured loan, make sure you are comfortable with the APR (annual percentage rate) by comparing rates and terms from lenders. If you are rejected for your loan, work on your current financial situation first. Our partner, Greenpath, offers free tips to get you started on your financial wellness journey.