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Betsy Wise
By: betsy_wise
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Secured vs. Unsecured Loan: Which Is Better?

You can get secured and unsecured loans. Both have their own set of pros and cons, so it’s important to understand the difference before applying for one.

A secured loan is one where the borrower puts up collateral to get the loan.

Unsecured loans are riskier for lenders, so they often come with higher interest rates.

So, which type of loan is better? It depends on the borrower’s situation.

This article will help you decide.

Apply For An Unsecured Business Loan!

 

Secured Loan

What is a secured loan?

Secured debt requires the borrower to put up some of their assets, called collateral, as a guarantee to pay back the loan in case of default. This way, the lender assumes less risk.

The collateral can include personal assets or assets owned by a business.

#DidYouKnow
There is also cross collateralization.

Rates

Typically, secured loans have a lower interest rate than unsecured loans since the lender uses collateral to secure the loan.

Borrowing limits

You may be able to borrow more money (thanks to the collateral).

Requirements

Secured loans can be easy to qualify for because the collateral you put up to secure the loan can serve as a way to offset any creditworthiness issues you have.

The lender will also consider your credit score, income, employment history, and other factors when determining whether or not to approve your loan.

Some lenders will appraise the collateral so they can offer a loan amount equal to the property’s appraised value. The lender will then place a lien on the property in question.

Repayment

Typically, the repayment term on secured loans is longer, at least when compared to unsecured loans.

You have to make monthly loan payments over a previously set period of years. The lender sets these rates when you sign the loan agreement, which can be either fixed or variable.

#DidYouKnow
Secured loans are less costly than unsecured loans because of the collateral.

Risk

Should you default (fail to make payments) on the loan, the lender can legally seize the assets used to secure the loan. Since the lender may repossess or initiate foreclosure proceedings, your credit report may show negative entries.

If the sold assets don’t cover the loan amount, you are still required to pay the loan balance.

Types of products

The most common types of loans with collateral are:

  • Secured personal loans
  • Secured business loans
  • Mortgages
  • Home equity loans or lines of credit
  • Auto loans
  • Secured credit cards

Pros and cons of secured loans

The main advantage of secured debt is that it usually comes with lower rates than unsecured loans. This is because the lender has less risk.

The downside is that many people don’t have assets to use as collateral.

If they do, they’re putting those assets at risk. You could lose your home or vehicle if you cannot make the payments.

A lower interest rate and being able to borrow more money are appealing, but incurring loan costs longer means you could end up paying more over the long run.

What does collateral mean?

Collateral is an asset that a borrower offers as security for a loan. If the borrower stops making payments on the loan, the lender can seize the collateral to recoup its losses.

Borrowers with bad credit may need to provide more collateral than those with good credit.

Common types of collateral include:

  • homes
  • cars
  • savings accounts
  • other high-value assets

Self-secured loan

Some types of secured debt are self-secured. This means you don’t have to put up collateral because the thing you buy with the loan is the collateral itself.

For example, an auto loan will allow you to purchase a vehicle that becomes the collateral itself.

Other types are:

Unsecured Loan

What is an unsecured loan?

Unsecured debt doesn’t require collateral to secure the loan. Therefore, there are no assets to seize if you fail to make payments.

Lenders can process unsecured loans within days compared to secured loans, which take considerably longer.

Rates

The interest rate the lender charges is generally higher than what you would pay for a secured loan.

Borrowing limits

The amount of money you can borrow may be lower because you don’t offer collateral to secure the loan (unless you have a perfect credit score).

Requirements

In the loan application process for unsecured debt, most lenders require that you have a good credit history and a reliable source of income. They will review your employment history and other factors.

Most of the time, requirements are more stringent due to the lack of collateral. Why? The lender needs to make sure you won’t default on the loan.

#DidYouKnow
At Camino Financial, we have minimal requirements.

Repayment

Since the loan is unsecured, you usually pay off the debt more quickly.

You pay back unsecured loans in monthly installments over the loan’s term, which is typically two to five years. The interest rates can be either fixed or variable, depending on the type of loan.

Risk

One of the biggest risks of taking out an unsecured loan is that you could end up owing a lot of money to the lender, and your credit score will take a hit.

If you can’t pay, the lender can still take you to court and get a judgment against you. This means the lender could garnish your wages or put a lien on your property.

Some lenders who offer unsecured loans require borrowers to sign a personal guarantee agreement. If the business can’t repay the loan, the person signing the guarantee pledges to pay the balance.

Types of unsecured loans

  • Unsecured personal loans
  • Unsecured business loans
  • Debt consolidation loans
  • Student loans
  • Lines of credit
  • Unsecured credit cards

Pros and cons of unsecured loans

Unsecured debt doesn’t require collateral, making them a good option for borrowers who don’t have any assets to use as collateral or don’t want to put their assets at risk.

They also tend to have lower interest rates than secured loans because they’re less risky for lenders.

On the downside, they may have higher interest rates than secured loans and may not be available to borrowers with bad credit.

And if you default, the lender can’t take your property as collateral.

Apply For An Unsecured Business Loan!

Secured Loan vs. Unsecured Loan: Comparison

Secured loanUnsecured loan
CollateralYesNo
RatesLowerHigher
AmountHigherLower
QualifyingEasierHarder
TermsLongerShorter
Where to findBanks, credit unions, SBA lenders, online lenders

Venn diagram comparing unsecured and secured business loans

Is It Better to Get a Secured or Unsecured Loan?

Choosing between secured and unsecured debt will depend on your needs and situation.

The borrower’s most considerable risk is putting up collateral to secure the loan. By doing so, you may lose your personal or business assets if you can’t repay the loan.

Most business owners are reluctant, and rightly so, to offer collateral in exchange for borrowing money. They’d rather get unsecured funding.

If you’re still uncertain what to do, another solution would be to find a lender who doesn’t require collateral, has minimal requirements and charges reasonable interest rates.

Camino Financial Unsecured Business Loans

Camino Financial doesn’t ask for collateral.

We offer unsecured business loans to give easier access to capital to entrepreneurs that don’t have assets to back up a loan.

Here are some of our benefits:

  • Possibility of lowering your interest rate. After 8 timely payments, you can qualify for a better interest rate or more cash.
  • Fewer requirements. Not only is collateral not required, but also we have fewer business loan requirements than most lenders.
  • Fast processing. Once we approve your loan, you’ll have the funds deposited in your account within 2-10 days.
  • No SSN required. You can qualify for a business loan even if you don’t have a Social Security Number. You can use an ITIN.
  • Limited restrictions on how you use the funds. Our loan restrictions are minimal, so you can use funds to meet any of your business’s needs.
  • Pay off the loan early. We don’t charge prepayment penalties when you pay off your loan in full before the term ends.
  • Bilingual customer service. Our loan representatives speak both English and Spanish.

We recommend that you apply for an unsecured business loan today and reap the numerous rewards we offer. Submitting your application won’t affect your credit score.

Apply now!

 

FAQs

What is better, a secured or unsecured loan?

The answer to this question depends on several factors, including your credit score, income, and the amount of money you need to borrow.

Why is an unsecured loan better?

Because they don’t require collateral, so you don’t put your assets at risk.

What is the difference between secured and unsecured debt?

With secured debt, you pledge an asset, such as your home or car, as collateral. The lender can seize the asset if you don’t make your payments. Unsecured debt doesn’t require collateral.

Is a personal loan secured or unsecured?

A personal loan can be both secured and unsecured.

 

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