To be a smart borrower, it’s important to understand each loan option available to you. Loans are either secured or unsecured. Here are some key differences between the two:
Understanding secured loans
Secured loans are loans backed with something of value that you own. This is called collateral. Common examples of collateral include your vehicle or other valuable property such as jewelry.
If you’re approved for a secured loan, the lender will hold the title or deed to the collateral or places a lien on the collateral until you pay the loan off in full. If you do not repay the loan, the lender may take possession of the collateral and apply the proceeds of the sale of the collateral to the outstanding debt.
The borrowing limits for secured loans are typically higher than those for unsecured loans because of the presence of collateral. Common types of secured loans include mortgages and vehicle loans.
How is an unsecured loan different?
An unsecured loan is money that you borrow without using collateral. Due to the lack of collateral, the lender faces a higher level of risk. Because of this, the interest rate may be higher and the borrowing limit may be lower. Common examples of unsecured loans include credit cards and personal lines of credit.
Know before you borrow
Both loan types have strengths and weaknesses, which can vary per borrower and lender. If you plan to apply for a loan, try to have a clear understanding of which option works best for your unique financial situation. Before you make any borrowing decision, make sure you can afford to pay back your loan in a timely matter without straining your budget.