When the money is tight, a loan can be of great help. There are loans to assist with every purpose these days: medical loans, wedding loans, car loans, home equity, etc.
Which one to take out is a trickier question. Let’s look at both secured and unsecured loans? How do they compare, what are the advantages and disadvantages of each option?
The purpose of the loan typically determines the loan type upfront. However, you are free to choose the option that is more affordable to you and compare between secured and secured loans. Secured loans imply collateral, i.e. offering some kind of asset for the lender to avoid the risk of losing money.
Unsecured loans present risk for the lender therefore these loans have higher interest percent. There are points in favor and against each loan type. Let’s look at each loan type closely.
Unsecured Loans
Unsecured loans don’t require collateral and the loan is calculated at a higher interest rate, and sometimes, additional fees or fines if such are implied by the loan agreement.
Unsecured loans are now more often taken out at alternative lending institutions, like loan express, for instance. Such creditors base their decision on the borrower’s credit score and the image of the borrower before other lenders, i.e. the record of repaying previous debt.
There are also payday loans that are very easy to get in a short period of time. Direct lenders like SpotLoan and GetLendly can help everybody. Because of soft credit checks, such companies become accessible to each person.
Unsecured loans are in great demand these days. They can be issues for many personal reasons: dental operation, home improvement, adoption, even a weekend getaway. There are 20.2 million personal creditors operating in the USA, that’s nearly as much as New York State would fit in.
Personal unsecured loans have an APR that’s lower than credit cards. That’s why some borrowers choose to cover their credit card debt with it or use it instead of credit cards.
How to Qualify for an Unsecured Loan
Traditionally, the decision-making on unsecured loans happens if a lender has all eligibility aspects.
There’s a system of 5 C’s of credit which involves:
- Character: credit score, employment status, references
- Capacity: income size and existing debt
- Capital: savings and investment accounts
- Collateral: the ability to offer assets for collateral
- Conditions: the ability to meet the loan terms
Pros
- Payments adjustability. Unsecured loans have flexible paying-off terms. The borrower can choose the loan period and repay the loan for up to five years.
- No collateral. Unless you repay responsibly, you won’t lose anything. Also, if you did want to put collateral, but don’t own any viable items, you could take out unsecured loans without it.
- Smaller loan amounts. The loan amount is usually lower than with secured loans and borrowers don’t have to repay more than they have asked for.
- The application process is a lot faster. There are even loan apps that have simplified the loan application so much that it only takes a minute to apply.
Cons
- Higher APR. Because there’s no collateral, the APR is higher.
- Credit score-based decisions. Lenders approve loan amounts depending on the borrower’s credit score. Consequently, good credit score borrowers have access to bigger loan amounts, better lending options, and lower APR.
- Short-time loans cost more. The shorter the loan amount the more it typically costs. To fully take advantage of personal loans and not overspend on interest rates, one should take out personal loans for at least a year.
Finally, there may be lenders that qualify underage borrowers or those with low income or no proof of income. But, typically, an unsecured loan applicant should be at least 18, an American resident, have a stable income, and sometimes have a cosigner to apply with.
Secured Loans
Secured loans require collateral to ensure a high loan amount. Popular types of unsecured loans are mortgage and car loans, the loan purposes of which serve as collateral. In reality, however, collateral can be another financial asset of yours. If the borrower fails to repay the loan, he loses collateral and this issue remains in his credit record for a long time.
The following items could be used as collateral:
- Real estate;
- Home equity;
- Cars and other vehicles;
- Banking accounts;
- Valuable items;
- Insurance;
- Stocks.
Once you agree to put a piece of property as collateral the lender puts a lien on it. The lien means that this item will be sold in case you don’t repay the loan and the money got from selling the item will be used to cover the remaining debt size. You may receive the remaining money from the sale if there is any left.
Credit card companies also use secured loans. They advise the borrower to put a deposit on the credit card and then give it back if the borrower closes his account.
Secured loans present less risk for the lender and more risk for the borrower. While the interest rate seems to be lower than that of unsecured loans, it’s still there and you have to pay it as well as other fees if the lender introduces them.
Pros
- Bigger loan amounts. Since personal loans’ amount only goes up to $35,000, they are a poor choice for future home or vehicle owners.
- Higher availability. Because the borrower’s assets back up the loan amount and reduce the risk for the lender, those borrowers with poor or no credit history can get qualified for such loans easier.
- Longer loan periods. Secured loans usually have fixed installment payments, making it easier to manage the loan repayment process. The borrower can also refinance the loan over time.
- If you’re eligible for tax deductions for the interest paid (each year of the loan), you can make it happen with secured loans.
Cons
- The risk of losing assets. Whichever asset you have stated as collateral, you have a risk of losing it if you fail to repay the loan.
- The loan purposes are very specific. While the loan amounts are bigger, you can’t entirely use them as you wish. The loan type serves as a sole purpose for buying a car or a house.
In reality, the borrower should assess the lender individually. Despite the loan type requirements and features, the borrower should look for a lending option that will match his needs and will do so at affordable rates and terms.
