The majority of people think that when looking for loan advice there will be a nice, calm introduction and then there will be a simple conclusion. This is wrong. The very first thing I want to say as advice related to borrowing money for large purchases (of which you will probably brag about to your family & friends) is when you are looking to purchase (a house) or (a car) or (any other type of item) that in the end will be something that we all can appreciate and brag about to you, secured loans tend to be the better option for many reasons.
In my opinion, secured loans tend to offer you the ability to borrow larger amounts at lower interest rates than unsecured loans and they will also make lenders feel more secure because they can hold your property as collateral.
Interest Rates – Here Come The Twists
Before we look at what these loans are, you need to realize that secured loans trained professionals tend to have lower interest rates than unsecured loans.
The reason for this is that lenders feel more secure with a loan because secured loans generally offer the lender guarantees in addition to having collateral.
A loan that has no collateral (an unsecured loan) has a different risk for lenders, therefore lenders will charge higher interest on unsecured loans because there is more risk involved.
Remember This One Thing
When you are having any conversation about loans, specifically secured and unsecured loans, there is one aspect of those loans that is more important than any other:
This is the essence of comparing the two types of loans. All other components, such as interest rates, loan limits, and the probability of gaining approval, are based on this one point.
How Much You Can Borrow (Secured Versus Unsecured)
If your dream is to borrow a large amount of money, say in the hundreds of thousands, you will want to go for a Secured Loan.
For example, if you are buying a house, car, or boat, you will be borrowing against them, which makes getting approved for large amounts of money much easier for the lender, as they will have the ability to repossess or foreclose on them in the event you stop making payments.
Unsecured Loans are an excellent way to buy your dream wedding, take a vacation, pay for college, or consolidate multiple credit cards into one payment. However, unless you have immense financial standing and are considered to have excellent credit, you should not expect to be approved for a six-figure unsecured loan.
The Way Both Loans Share Fundamental Similarities
Regardless of whether or not your loan is “secured,” both types of loans share a common element. That is, they both involve borrowing an amount of money, repaying it by making periodic payments over time (known as a loan term), and paying interest on the principal borrowed.
Additionally, you will almost always be judged on your credit score when seeking a loan. Having an excellent credit rating usually results in a lower interest rate. Alternatively, having a poor credit rating results in a much higher, and often more unaffordable, interest rate.
Qualifying for a Loan
An interesting difference between the two types of loans is the relative ease with which you may qualify for a secured loan, compared to an unsecured loan. For example, if your credit rating is less than perfect, many lending institutions may view your anticipated payment history as a positive indication of your likelihood to repay your loan, and thus provide you with better access to a secured loan.
In contrast, unsecured loans are more dependent on your creditworthiness, since there are no collateral assets available to secure the loan. Therefore, lenders will generally impose stricter requirements to qualify for unsecured loans.
In addition to mortgages and auto loans, most people have secured loans for items they may not otherwise consider, including:
Buying a recreation vehicle (R.V.), boat, or motorcycle (collateral is the recreational vehicle)
Home equity lines of credit (collateral is the home)
Although you may not commonly think of unsecured loans as coming from many sources, these are also used for completing personal obligations that are more flexible in nature, such as:
- Buying a diamond engagement ring for your fiancée
- Paying for college tuition
- Taking a once-in-a-lifetime dream vacation
- Consolidating multiple credit card balances into one monthly payment
Both types of loans may provide valuable help but serve somewhat different purposes.
How do I know which loan type to select?
Typically, this is where I introduce the content (such as information about the different loan types). But instead, I will drop my title name here:
When you want to minimize your borrowing costs by securing the lowest interest rate possible and getting as much cash in hand as possible, you should select a secured loan.
If you do not wish to put any of your assets on the line to secure the loan, then go with an unsecured loan.
The true question to ask yourself is:
“Will this loan help me achieve my long-term financial goals, or is it just making things prettier for right now?”
If you can answer that question with honesty, you are doing better than the vast majority of people.
Additional Advice
- Check out other lenders.
- Credit unions and internet-only lending institutions offer the best interest rates.
Once you find a lender, be sure that you read through everything thoroughly before signing your name on anything (such as how much you will pay every month, how long you’ll be in debt, what happens if you miss a payment, etc).
To sum it all up:
Whether you choose secured or unsecured loans, once you know how these types of loans work, they are much less intimidating to select from.
