What is the difference between a secured and unsecured loan?

Everything you need to know when considering an unsecured loan.

When thinking about taking out a loan, it’s important to understand all the factors that will help you determine what kind you need.

• Do you have an excellent, good, average or poor credit score?
• How much money do you need to borrow?
• How much can you afford to pay every month?

Even though there are other factors that will influence your final decision, having these answers will help you get a step closer to the main question you should be asking: Do I need a secured or unsecured loan?

Unsecured vs. secured loans 

According to Experian, one of the largest credit bureau agencies in the United States, “When you take out a secured loan, you provide some form of collateral (such as your home or car) to act as security for the lender, protecting them from loss if you fail to repay the loan. An unsecured loan does not use any collateral. Unsecured loans may be considered higher risk for the lender and can come with less favorable interest rates and terms.”

An easy way to understand this can be the example of buying a car versus taking out a loan to pay for your wedding. Even though you are borrowing money you’ll need to repay in both cases, if you fail to pay off your auto loan, the lender can take the car away, as it is collateral, whereas if you fail to pay off the loan for your wedding, there is nothing physical to take away, so you will be sent to collections. The first case would be a negative outcome from a secured loan, and the second one is associated with an unsecured loan.

Unsecured loans include student loans, personal loans, and credit cards, which are also known as revolving credit because you are borrowing and repaying monthly

How many Americans have taken out unsecured personal loans?

A recent study by Finder.com states that 34% of Americans have taken out personal loans. “According to our survey, loans fall anywhere between $50 to $200,000. In that vast range, the average loan is a modest $7,576. Baby boomers slightly exceed the norm, borrowing an average of $7,703. Millennials are borrowing $7,046 per personal loan on average,” they share.

Why consider an unsecured loan?

Generally, in order to qualify for an unsecured loan, you will need a good credit score (above 700) and good credit standing, as it is riskier for the lender to loan you money due to the lack of collateral. Some lenders specialize in lending to consumers who may not qualify for loans from banks and other traditional sources. These consumers — often referred to as “near prime” — don’t qualify for the lowest rates, but can often get fair rates and manageable payments from such lenders despite their lower credit scores. 

Disclosure: LendingPoint is a lender that specializes in giving near prime customers access to personal loans.

What are the consequences of failure to make loan payments? 

Just like any other loan, when you receive the money you are borrowing from the lender, you agree to a series of stipulations for repayment. With unsecured loans, the lender has a bit more risk as there is no collateral involved, but late payments or failing to pay off your loan under the agreed upon terms will still result in legal action towards you, your account being transferred to a collections agency and, ultimately, negative impact on your credit score for years to come.

What are the best lenders? 

Are you thinking about taking out a loan but aren’t sure what kind suits you best? When shopping around for the best lenders, a few things you should look for are:

• Competitive interest rates, wide availability, and transparency
• Repayment stipulations that fit your needs
• Unemployment protection program
• Flexibility for missed payments