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The Difference Between Unsecured and Secured Loans

For those who are relatively new to the subject of credit, there may be some confusion between the different types of loans in the market. Some have different requirements, repayment options, and even qualifiers. If you want a better understanding of the many types of loans available today, here is a basic breakdown of what to expect.

Unsecured Loans

When you take out an unsecured loan, you are getting a loan of money based on qualifying with the financial institution and them believing that you will be able to pay them back appropriately. They look at your history of repaying loans and other forms of debt through your credit report and current income statements, and make the decision from there. They will expect you to be able to keep up with your payments as promised, and they will make sure you understand the consequences should you fail to repay your loan as promised.

Most unsecured debt comes in the form of credit cards and installment loans. The combination of your credit report, credit score, financial stability, and employment history show the lending institution what they need to know to best determine how much money to extend to you for your loan. This can be for emergencies, to cover a new car or home, or to remodel your current home. The quicker you pay these loans back, the more stability you show that particular lender. If you continue to pay them back on time or even a little early, they may extend more credit to you in the future.

Secured Loans

If you are considering taking out secured loans, this means that you are putting a lien against something you own outright as a way of showing your promise to pay the money back as promised. This type of loan is similar to a title loan on an owned car or a credit card where you put the money on the card before spending it. While this is not ideal for most people with a less than stellar credit history, it does help rebuild credit and helps build up trust with the lending institution that gave out the secured loan. You will still have to qualify under the specific requirements for the institution, but the qualifiers are often different for secured loans.

You will also be required to repay the loan on time, just as you would with an unsecured loan. The main difference is if you fail to repay the loan as promised when the loan began, the institution can come after whatever items you secured the loan with as a way to get their money back. So, if you used your vehicle as collateral, the financial institution can come after your vehicle as a way to recoup their costs. This can be quite difficult for someone who is struggling financially as he or she could potentially lose the items owned if a payment is missed and not worked out with the lender immediately.

Planning Ahead

If you really need a loan, you will likely settle for whatever is offered. However, if you have the time to plan out the loan ahead of time, you will want to make sure you do everything you can to have your credit score high enough to get an unsecured loan. This means that the lending institution trusts you enough to lend you money and believes you are capable of paying it back. Having a solid credit rating from consistently paying your bills in full and on time can come in very handy when the time comes where you need a loan. Hopefully this helps you understand a bit more about the types of loans out there so you know what to do to get the loan you want or need.