When taking out a loan, the first thing to know is that many options exist! One of the first choices to make is whether a secured loan or an unsecured loan is best. Both options allow clients to borrow money from a lender, but what are the differences? Which one is the right loan choice for your situation?
This informative guide will help readers review the key differences between these two types of loans, including the advantages and disadvantages of both options. Readers can also determine whether a secured or unsecured loan best suits their needs.
What Is a Secured Loan?
A secured loan requires collateral on behalf of the borrower to receive funds from a lender. If the borrower fails to make the required payments, the lender can take ownership of an asset.
Secured loan collateral comes in several forms, such as houses and cars.
What Are the Advantages of a Secured Loan?
Using a secured loan to borrow money comes with many benefits, but some of the most noteworthy advantages include:
- Supports large loan amounts
- Easier to qualify for than other loans
- Lower interest rates than other loans offer
What Are the Disadvantages of a Secured Loan?
In contrast to the above advantages, it’s essential to understand that secured loans also present drawbacks. Some of the key cons include:
- If payments are missing, the lender can seize collateral.
- Secured loans generally require a hard credit check.
- The borrower may have to provide a down payment.
What To Purchase With a Secured Loan?
Borrowers can use secured loans to purchase a variety of items or assets, such as:
- Cars, boats, and recreational vehicles
- Homes
- Jewelry
The secured loan’s terms often specify how to utilize the funding.
What Happens If the Borrower Defaults on a Secured Loan?
As previously mentioned, the lender can seize the borrower’s collateral if the borrower fails to provide the necessary payments. However, defaulting on a secured loan can also negatively impact the borrower’s credit score. This may cause the lender to involve a debt collector or even sue the borrower.
What Is an Unsecured Loan?
An unsecured loan does not require collateral from the borrower. Instead, the lender uses the borrower’s credit score as a prerequisite to providing a loan.
What Are the Advantages of an Unsecured Loan?
Although an unsecured loan is (quite literally) a less secure loan option, this type still presents several advantages. Some of the most significant benefits include:
- When lending money, lenders do not require borrowers to provide collateral.
- The loan application process is generally faster.
- Flexibility exists in how one allocates the funds.
What Are the Disadvantages of an Unsecured Loan?
Just as there are downsides to getting a secured loan, there are drawbacks to getting an unsecured loan. Some of the main cons include:
- Higher interest rates in comparison to other loans
- Usually requires the borrower to have a strong credit history and a high credit score
- Smaller loan amounts
What To Purchase With an Unsecured Loan?
On the other hand, unsecured loans offer more flexibility in how one utilizes the funds. Some examples include:
- Auto repairs
- Medical bills
- Student loans
- Event expenses like vacations and weddings
What Happens If the Borrower Defaults on an Unsecured Loan?
Lenders cannot seize any assets if the borrow is not meeting payment requirements. This is because unsecured loans do not require collateral from the borrower. Instead, the lender can involve debt collectors, notify credit reporting agencies of the situation, or even sue the borrower.
Choosing a Secured Loan or an Unsecured Loan
To decide which type of loan is the right choice, there’s one question you need to ask yourself: What do you intend to use the money for?
A secured loan may be the better option if you’re planning to make a large purchase, such as a new house or car. This is because the lender can use the asset you purchase as collateral. This makes getting approval for a loan more straightforward and can result in a lower interest rate.
If you’re looking to borrow money for a smaller expense, such as an unexpected medical bill or a home repair, this is the better choice. This is because you do not have to risk any of your own collateral. This also makes getting approval for a loan more manageable and can result in a quicker turnaround time.
Ultimately, whether to choose a secured or unsecured loan will depend on your intended use of the funds. Do your research and compare different loan options before making a decision.
If you’re still unsure and need more help selecting, you can learn more at amerantbank.com about our loans and follow Amerant on our social channels, including Facebook, Twitter, Instagram, and LinkedIn @AmerantBank.
