Understanding Unsecured Vs. Secured Personal Loans

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It’s easy to apply for a personal loan – the Internet has become a fast and easy way to research and compare lenders, and then apply and receive your money, all without leaving your computer. But it’s important to understand just what type of loan you are getting, and especially the difference between a secured and unsecured loan.

The biggest difference between the two types of loan is that a secured loan comes with security, or collateral. If you don’t make the monthly payments on time, the loan company will hold the title or deed to your car or house and can come and take your car or property in exchange for the non-payment. It’s obviously important that you can afford to make the payments on time and in full if you apply for this type of loan. A car title loan is a common example of a secured loan; the loan company can repossess your car if you fail to make the payments; a home equity line of credit is another, and the money is loaned based on the value of your home.

An unsecured loan isn’t secured on your car, property or other assets and the personal loan company can’t take any of these away from you if you don’t repay the loan. Of course, if you don’t make the payments in a timely manner, your credit will be adversely affected, and the loan company will persistently call or write to you in an effort to get payment. And collection activity is always possible, even on an unsecured loan. Most credit card debt is unsecured, as are medical bills and store credit card debt.

A secured loan has several advantages over an unsecured loan. The interest rate is generally lower, meaning that your monthly payments and the total amount you repay are lower; the lender can afford to do this because of the security against the loan. The term over which the loan must be paid back may be longer, which can also help to make payment amounts lower. You may also be able to borrow more than if you were taking an unsecured personal loan. However, unsecured loans are typically available to more borrowers, and often come with an initial payment grace period, meaning that you don’t have to make a payment for the first month or two. You may have more flexibility deciding how long you want to take to pay back the loan, and of course being unsecured means that you don’t have that risk of losing your home or car.

If you are looking for the right personal loan, it’s important to do some research and comparison shopping, comparing lenders, interest rates and features of the loan, as well as carefully reading all the small print. Keep in mind your ability to make the payments regularly and don’t borrow more than you can comfortably afford to repay.