Understanding Secured Vs. Unsecured Debt

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Understanding Secured Vs. Unsecured Debt

What is the Difference Between Secured vs. Unsecured Debt?

Unsecured debt refers to a debt obligation that doesn’t have a form of collateral involved to guarantee the loan or financial product. Generally, unsecured debt obligations are somewhat more common when compared to their counterpart, secured debt, which includes using collateral to secure the loan. This collateral can be a lot of different things, including a home, jewelry, boat, or car. 

To better understand the difference between unsecured and secured debts, it will be helpful to dig deeper into how they work for both borrowers and lenders.

For a borrower, obtaining approval for unsecured debt will depend mainly on their creditworthiness. And so, borrowers with poor credit may find it challenging to get a large loan amount through an unsecured loan. In fact, they may not be able to obtain loan approval at all. A cosigner can improve the chances of approval for unsecured loans. Secured loans can often provide more flexibility when it comes to borrowers with bad credit histories.

With an unsecured loan, a lender will usually have stricter application criteria, because if the borrower fails to repay the loan, then there really isn’t any collateral to protect them from losing money. And so, because they only work with fair to good credit borrowers, chances are that they will get their payments on time (although that is not always the case). 

With secured loans, lenders can repossess the asset that was pledged as collateral for the loan, so the interest rates may be competitive – but it ultimately depends on the financial product, the lender, and the borrower’s financial history. With secured loans, usually, borrowers will either have to hand over the collateral while repaying the loan or give them legal ownership through paperwork until the loan is repaid in full. 

Is it Easier to Apply for Secured Debt? 

Generally, yes, it is easier to apply for a secured loan than an unsecured loan. Title loans and other types of secured loans can even cater to individuals with subprime credit, meaning that they don’t have a very strong financial history. 

What is an Unsecured Loan? 

Here are some examples of unsecured loans:

  • Personal Loans: Personal loans can be used for a variety of financial issues and are available in a wide range of loan amounts (depending on your income and your credit history). With these loans, you will get the funds upfront as a lump sum, and you can use them as you need to. A steady monthly payment will be required until the loan is fully repaid.
  • Student Loans: Student loans can help you pay for higher education. If you are approved for one of these loans, the funds will be sent straight to the school. With student loans, you usually won’t have to start repaying the loan until a few months after you graduate, giving you the time and convenience to get on your feet. These loans are also repaid in steady monthly payments, either with a fixed or variable interest rate. 

What is a Secured Loan?

Here are some examples of secured loans for your reference:

  • Car Loans: Car loans are used by borrowers to finance a new or used vehicle. You can find them at banks, credit unions, online lenders, and dealerships. These loans can only be used to purchase a vehicle. 
  • Home Equity Loans: Home equity loans are a type of secured funding that uses the borrower’s home as collateral. Many people use these loans for home repairs or renovations, but the funds can be used for almost anything. 
  • Car Title Loans: You can access a portion of your vehicle’s total value by pledging your car or truck’s title as collateral for a title loan. Typically, you will repay a title loan in installments, and the lender will hold onto your vehicle title until the loan is completely paid off. Click here to learn more.

Should I Apply for a Secured Loan or an Unsecured Loan?

Ultimately, the type of loan you should apply for depends on your financial situation and the reason why you need the money. For example, if you need fast cash to take care of an unexpected medical bill, you wouldn’t apply for a home equity loan! It is important to explore your options and make the best choice for your personal needs and financial goals. 

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