Deciding Between Secured and Unsecured Loans
Finding the right loan for you and your financial needs is
important... after all, you don't want to pay any more for your
loan than you absolutely have to. When shopping for a loan,
however, you might find yourself facing a decision between
applying for secured and unsecured loans.
If you're not entirely sure what the difference is or which type
of loan is right for you, then the information provided below
should shed a little bit of light on these two different types
of loans and when the best time is to use each.
Defining Secured Loans
Secured loans are called this because they use collateral (which
is some item of value that can be sold to recover the money that
has been borrowed if the borrower is unable to repay the loan)
as security to guarantee the repayment of the loan. As a result
of the collateral that is used to secure the loan, banks and
other lenders are usually more willing to grant lower interest
rates for secured loans. The interest rate offered depends upon
the credit rating of the person applying for the loan as well as
the value and ease of finding a market for the item used as
collateral.
Defining Unsecured Loans
As the name might imply, unsecured loans are loans that do not
use collateral as a guarantee that the loan will be repaid.
Because of this, unsecured loans are much more likely to have a
higher interest rate. These loans are still advantageous,
however, since there is no collateral that could be seized and
sold by a bank or other lender. Unsecured loans are generally
given to individuals with good credit, though depending upon the
amount to be borrowed there are some unsecured loans which are
offered to individuals with less-than-perfect credit as well.
When to Use Secured Loans
Secured loans can be used in a variety of different
circumstances, especially in those cases where the individual
who is applying for the loan doesn't have the best of credit.
This doesn't mean that secured loans are used exclusively by
individuals with bad credit; many people with good credit still
choose to use secured loans for their needs because they can get
a lower interest rate that way.
Additionally, some high-value items such as real estate and
automobiles serve as the collateral for their own loan and
therefore don't have much of an option aside from secured loans.
The larger the amount to be borrowed is, the more likely you are
to have to take out a secured loan to borrow it.
When to Use Unsecured Loans
Since they don't have the guarantee of collateral, banks and
other lenders are generally much more careful when issuing
unsecured loans. For lower-value loans, however, unsecured loans
can be very helpful. Short-term loans that are unsecured can
save on paperwork and remove the fear of losing your collateral,
all the while not hurting you too much with a higher interest
rate because of the shortened amount of time that it takes to
repay the loan.
Though many lenders are hesitant to make unsecured loans to
individuals with poor or bad credit, a thorough search can help
you to find lenders willing to make unsecured loans to
individuals regardless of their credit. This can be useful in
catching up on some bills, consolidating them into the single
unsecured loan payment.
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