Applying for a loan presents a myriad of options.
Different interest rates, term agreements and lenders all need to be considered. And in addition to the spate of choices that borrowers need to review, they’ll also find that their loans fall into one of two categories: secured or unsecured.
Secured loans are those that are covered – or secured – by collateral. A mortgage, for example, is a secured loan that uses your house as collateral. An auto loan is secured, too; but in this case, the collateral is your car. Other examples of secured loans include:
- Home Equity Loans
- Small business loans
- Boat or RV loans
Savings accounts, Certificates of Deposit, cash and even some life insurance policies and investment accounts can all be used as collateral.
An unsecured loan is one that doesn’t have any collateral tied to it. These include:
- Student loans
- Credit cards
- Personal and Overdraft lines of credit
Which Option Is Best For You?
Now you’re probably wondering why you should choose one over the other. There are a few things to consider.
The most important factor to be aware of is that when you borrow a secured loan, you’re at risk of losing your collateral if you’re not able to make payments. This means, for example, that you lose your house (go into foreclosure) if you fail to make your mortgage payments.
Keep this in mind. You don’t want to risk losing something valuable. If you’re not confident you can pay back the loan, don’t borrow. With an unsecured loan, failure to make payments doesn’t mean you’ll lose your collateral, obviously. However, defaulting on either a secured or unsecured loan will put a dent in your credit.
You’re likely to receive better rates on a secured loan. That’s because the loan collateral means less risk for a lender. Unsecured loans often have higher rates. A borrower with a lower credit score might have a hard time getting an unsecured loan since it presents more risk.
Check Out More Financial Literacy Resources
Smart financial decisions start with education. Check out Sunrise Banks’ financial literacy resources, including our partnership with Banzai.