Secured vs. Unsecured Loans
If you’re shopping around for the right loan to fit your financial needs, it’s important to do your research and understand the different options you have. Understanding the difference between secured and unsecured loans is an important step in achieving financial literacy and can have a long-term effect on your financial health. We are here to help you understand the difference between secured and unsecured loans so you can choose the best option to fit your financial situation.
Secured Loans
Secured loans are “secured” by collateral. This can be an asset such as your car, home, or even an investment account that you use to back up your loan. The lender will hold the deed or title to your asset until the loan is paid back in full. Here are some of the basic features you need to know about secured loans:
- Qualification – Secured loans are easier to qualify for. Lenders will consider your credit score, payment history, and income and debts, but adding collateral gives them more confidence to lend to you.
- Rates – Secured loans typically offer lower annual percentage rates (APR). These rates are determined by the same factors that lenders use to qualify you for the loan. The value of your collateral can also affect your rate.
- Repayment – Payments for secured loans are usually fixed rate, monthly installments repaid over a few years, but can have variable rates which your monthly payment may vary.
- Risk – With secured loans, the penalty of failing to pay back the loan on time and in full is twofold: both your credit will be impacted and the lender has the right to seize the collateral you put up.
Common examples of secured loans include mortgage loans, home equity lines of credit, auto loans, boat loans, and recreational vehicle loans.
Unsecured Loans
Unlike secured loans, unsecured loans do not require collateral, but this means that your approval is based on your credit. This could mean you have to pay more in interest than you would with a secured loan, but there’s no chance of you losing an asset. Here are some features to keep in mind when looking into unsecured loans:
- Qualification – Typically borrowers with good and excellent credit (usually with a 690 or higher FICO score) have the best chance of qualifying for unsecured loans.
- Rates – Unsecured loans have fixed rates that range from 6% to 36% APR. The lowest APRs usually go to the most qualified borrowers while borrowers with fair or bad credit (usually with a 689 or lower FICO score) get higher rates.
- Repayment – Unsecured loans are repaid in fixed, monthly installments, with repayment terms of usually two to seven years.
- Risk – This type of loan may be safer for some borrowers. If you fail to pay, only your credit will be impacted rather than losing an asset as well. However, if the loan is in default, which happens between 30 and 90 days after you miss a payment, it can be sent to collections and the collection agency could take you to court to collect the debt.
Common examples of unsecured loans include various types of credit cards, student loans, some types of personal loans.
Deciding on the best loan option to fit your financial situation requires research and time. You never want to rush into the first loan offer you can find. We are happy to help point you in the right direction with our various personal loan options. Apply online or make an appointment at your local branch and one of our member service representatives would be happy to help you get the loan you need.
At Robins Financial Credit Union, our mission is to enhance the financial well-being of our members and community. We honor this commitment by providing educational content to help you make the most of your finances. Read our other blog articles to help you gain the financial knowledge you need to succeed.