What is the Difference Between a Secured and Unsecured Loan?

September 11, 2020

If you’re looking to borrow money, you’re undoubtedly aware that there are many loan options to choose from on the market today. When shopping for a loan, you will notice that loans typically fall into two categories, secured and unsecured. Your borrowing need and financial circumstances will ultimately  determine which type is the best fit for you,  but it’s also important to understand  the basic characteristics of the each loan.

Secured loans are always guaranteed by some type of collateral. Mortgages, home equity loans and lines of credit and car loans are some of the most common types of secure loans. Depending on the loan type, the collateral could be a home, car or something else that is of value that could be reclaimed by the lender in the event that you are not able to pay the loan as agreed. Secured loans typically boast a lower rate, higher loan amounts and can be easier to get approved since they represent less risk to the financial institution. Their loan terms are often based on the type of collateral securing the loan, for instance a 15 or 30-year mortgage or 3-5 year for a vehicle loan. Having sufficient collateral to cover the amount that you are interested in borrowing is not the sole determining factor in getting an approved loan. Your bank will still review your  credit history, credit score, debit to income ratio and other criteria to make sure you are eligible for the loan.

Unsecured loans are loans that are not secured by collateral. Credit cards, personal loans and personal lines of credit are the most widely offered unsecured loans. While approval for this loan type is still usually dependent on your credit history, this loan is approved without collateral because the lender has determined that you are not at a high-risk of defaulting on the loan. Unsecured loans are riskier for the lender and therefore usually have a higher rate of interest, shorter term and lower loan amount. These loans are frequently used for smaller purchases and because of the lower loan amount are generally approved quicker than a secured loan.

Both secured and unsecured loans have their advantages depending on what you are working to accomplish. If you are on the fence, call one of our experienced lenders to help you determine which type would be best to fit your specific borrowing needs.