Secured Loans and Unsecured Loans – What’s Right for You?

There are people that say secured loans are better, and there are those that say unsecured loans are definitely the optimal choice. With these varying statements, it’s easy to get confused as to picking the right type of loan. But, there really is no such thing as the best loan to take. How it will work for you will depend on your needs and financial situation.

So before you choose any loan, make sure you know the basics of secured loans, and how they differ from unsecured loans. A secured loan is a type of loan that is secured against an asset such as property, which will serve as collateral. On the other hand, an unsecured loan does not require you to secure the loan against an asset. The lender only relies on your word and promise to pay.

Basing on that alone, it seems a good deal to go for unsecured loans. This way, you don’t have to secure your loan against an asset. But there are certain advantages of secured loans that are not present with unsecured loans.

Because the loan is secured against an asset, the lenders do not assume a high risk in lending you money. In the event that you cannot come up with the payments any longer, the lender can repossess the item you listed as security, and sell it to cover the balance of your loan and the extra costs incurred in recovery of the money. So no matter what happens, the lender can still get the money you owe him. For this reason, you will find it easier to get approved for a secured loan compared to an unsecured loan.

Also, lenders will be more willing to give you lower interest rates compared to an unsecured loan. This means you can save thousands of dollars in interest fees over the life of your loan. Also, most secured loans offer perks such as payment holidays, wherein you don’t have to make repayments for a specified period, and favorable redemption charges, like no penalty for pre-payments.

Furthermore, you can borrow a higher amount of money compared to unsecured loans. Usually, the range goes from $5000, up to $75,000, or even higher than that, depending on the lender. Typically, the loan is to be repaid on a monthly basis, and over 5 to 25 years, depending on your ability to come up with the monthly payments. Longer repayment period means lower monthly payments, but higher interest fees in the long run. So as much as possible, go for the shortest repayment period that you can afford.

On the other hand, with no security against a loan, you will find it rather hard to get approved. This is because the lender assumes a high risk at lending you money. He only has your word to trust. Also, expect higher interest rates in unsecured loans.

So, if you have something you can write down as security for your loan, it is best to choose secured loans. But if you don’t have much asset to secure the loan, then an unsecured loan is the option for you. The choice really depends on your needs, payment capability, and financial situation.

2 thoughts on “Secured Loans and Unsecured Loans – What’s Right for You?

  1. “there really is no such thing as the best loan to take.” I agree 100% – totally dependent on each person’s financial situation and level of comfortability. Enjoyed reading this :)

  2. There’s no doubt that secured loans are one of the root causes of the fact that here in the UK we have the highest level of per capita debt anywhere in the world. Loan brokers gorged themselves on an encouraged market of new borrowers who were spurred on by runaway home valuations giving them massive equity levels to play with. It’s all coming home to roost now and foreclosure, or repossession as we call it here, is set to become headline material for years to come.

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