Most loans fit into two categories – secured or unsecured. When you compare loans you can look into both options and see what will be better for your specific situation.
A secured loan means that something is held by the lender as collateral. If you default on the loan or in some cases if you are late on your payments for an extended amount of time, the lender can take away the asset and make it their own in place of the money that you owe.
The most common example of this is a home loan. When you compare loans for purchasing a home you will notice that each one is a secured loan with the house being the asset that the lender can take back.
Another example would be a vehicle loan. If you purchased from a sales lot, a dealership or even a private seller, you will notice when you compare loans that most are secured. In this case, the vehicle is the security for the lender. (This is one reason why you are required to have full coverage insurance on a vehicle that is not paid off.)
Unsecured loans don’t require anything to be used as collateral. You aren’t offering anything to the lender. However, they are still going to lend you money. There is a higher risk that comes with unsecured loans. When you compare loans that are secure and unsecure, the unsecure loans will have a higher interest rate. In most cases a person will default on an unsecured loan before they will default on a secured loan.
Lines of credit with a bank or credit cards are an example of unsecured loans. You are able to use the bank’s money but you aren’t offering them anything to take in case you stop paying.
Every time that you borrow money, whether secured or unsecured, the lender checks your credit. If your credit is less than stellar it may be more difficult to receive an unsecured loan. However, because there is less risk for the lender you are more likely to be approved for a secured loan.
When comparing loans it is important to look at the positive and negative features of each. A secured loan will have a lower interest rate and may be easier to come by for someone that hasn’t done well with credit in the past. However, if you do not make the payments you could lose something like your house or your vehicle. For many people this is a frightening thought, but still something they will do in order to purchase a home or vehicle.
An unsecured loan like a credit card or line of credit can be used for anything. Unlike secured loans you have quick access to the funds and can spend them as you see fit. You don’t have to check with the bank for every credit card purchase you make. If you default, there isn’t an asset that can be taken away.
But the unsecured loan has a higher interest rate because it is considered by lenders to be more of a risk. You are going to pay more to borrow the money. Each person’s situation is different. It is up to you to compare loans and decide which option is best based on interest rates, asset availability and even opportunity.