Secured Loans vs Unsecured Loans: What’s the Difference?

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While some people swear by a cash-only lifestyle, the truth is that most of us rely on credit to pay for life’s big expenses over time. When you want to buy a big ticket item like a house or car, open or expand a business, renovate a kitchen, or pay for your education, you can apply for a loan from your local office or online to help cover the cost. .

When considering your credit options, you may need to choose between a secured loan and an unsecured loan. Secured loans require you to offer something you own as collateral in case you cannot repay your loan, while unsecured loans allow you to borrow the money directly (after the lender reviews your finances) .

There are pros and cons to both types of loans, so before deciding anything, it’s best to understand the terms attached to them.

What is a secured loan?

A secured loan is a loan secured by collateral. The most common types of secured loans are mortgages and auto loans, and in the case of these loans, the collateral is your home or car. But in reality, collateral can be any type of financial asset that you own. And if you don’t repay your loan, the bank can seize your collateral as payment. A recovery stays on your credit file up to seven years.

When you take out a secured loan, the lender puts a lien on the asset you are offering as collateral. Once the loan is paid off, the lender removes the lien and you own both assets free of charge.

Here are the types of assets you can use as collateral for a secured loan, depending on Experian:

  • Real estate
  • Bank accounts (chequing accounts, savings accounts, CDs and money market accounts)
  • Vehicles (cars, trucks, SUVs, motorcycles, boats, etc.)
  • Stocks, mutual funds or bond investments
  • Insurance policies, including life insurance
  • High-end collectibles and other valuables (precious metals, antiques, etc.)

Secured credit cards, such as the Capital One® Secured Mastercard® and the First Tech® Federal Credit Union Platinum Secured Mastercard®, are another example of a secured loan. The collateral, in this case, is the money you deposit (often a $200 refundable deposit) that acts as your initial credit limit. You get your deposit back when you close the account.

Because your assets can be seized if you don’t repay your secured loan, they are arguably riskier than unsecured loans. You still pay interest on the loan based on your creditworthiness, and in some cases a fee, when you take out a secured loan.

Don’t miss: The best secured credit cards of October 2020

What is an unsecured loan?

An unsecured loan does not require any collateral, although you will still be charged interest and sometimes fees. student loans, personal loans and credit cards are all examples of unsecured loans.

Since there is no collateral, financial institutions grant unsecured loans largely based on your credit score and past debt repayment history. For this reason, unsecured loans can have higher interest rates (but not always) than a secured loan.

Unsecured personal loans are gain popularity. According to the Online Lending Market, there are approximately 20.2 million personal loan borrowers in the United States. loan tree. You can take out a personal loan for almost any purpose, whether it’s renovating your kitchen, paying for a wedding, taking a dream vacation, or paying off credit card debt.

Most people get personal loans for debt consolidation, and because personal loans tend to have a lower APR than credit cards, borrowers can often save money on interest.

What you need to know before taking out a loan

Before taking out a personal loan, whether secured or unsecured, make sure you have a clear repayment plan.

As a general rule, only borrow what you know you need and can afford to repay. Make sure you are comfortable with the repayment term. Just because you can get a loan doesn’t mean you should, so take your time and do your research before signing on the dotted line.

Learn more: 10 questions to ask yourself before taking out a personal loan

Information about the Capital One® Secured Mastercard® and First Tech® Federal Credit Union Platinum Secured Mastercard® was independently collected by CNBC and was not reviewed or provided by the issuer prior to publication.

Editorial note: Any opinions, analyses, criticisms or recommendations expressed in this article are those of Select’s editorial staff only and have not been reviewed, endorsed or otherwise endorsed by any third party.