Knowing the Differences Between Secured and Unsecured Loans
Borrowers who opt for a secured loan must provide collateral to the financial institution. Collateral includes assets such as a home, vehicle, or stocks and bonds. Unsecured loans do not require collateral from the borrower, but these type of loans may be reserved for individuals with superior credit scores because of the risks for the lender. Unsecured loans are based on credit, employment history, the ability to pay back the loan and the borrower's character.
Secured loans often feature a lower interest rate because the lender can seize the assets or collateral if the loan is not repaid or the borrower defaults on the loan. Lenders offering unsecured loans are at more risk and therefore often present higher interest rates to the borrower to offset the financial risks. Most lenders offer a fixed interest rate that cannot change for unsecured loans, whereas secured loans may be subject to varying interest rates over the course of the loan.
Borrowers who opt for an unsecured loan are usually financed short-term loans for smaller amounts than secured loans. Secured loans are often based on the value of the collateral, so borrowers may be able to acquire funds for the amount of the assessed property, vehicle or item. Unsecured loans are typically common for individuals who need short-term emergency funds in smaller amounts.
Secured loans require collateral, so it is necessary for lenders to conduct appraisals to assess the value of the assets. As a result, secured loans may take longer to process and require more paperwork to be submitted from the borrower. Unsecured loans do not require collateral, so the approval process may be much faster than a secured loan. Some lenders may be able to distribute funds within hours or a few days for unsecured loans once the application is completed and approved.
People seeking loans have many options. The two primary categories of loans are secured and unsecured, which vary based on payment terms, collateral and interest rates. Individuals should be knowledgeable of the differences between secured and unsecured loans to acquire funds that meet their short- and long-term financial needs.