Secured Loan vs. Unsecured: Understanding the Different Types

There are several types of loans out there, from travel loans and loans for the unemployed to laptop loans, loans for funerals, and even cosmetic surgery loans.

There seems to be a loan for everything under the sun these days, and we understand that all of this can be overwhelming, so we’ve narrowed it down to two convenient groups: secured and unsecured.

Let’s compare and contrast secured vs unsecured loans to help you make a quick and informed decision.

What this article covers:

What Are Secured Loans and How Do They Work?

Secured loans imply that you usually need to provide collateral to qualify. If you stop paying the loan, the lender may take the collateral and sell it to cover any losses incurred. You can use many things as collateral, commonly used for mortgages, car loans, and home equity lines of credit.

secured loan vs unsecured

The interest rates on secured loans are often lower than those on unsecured loans, which is one of their key advantages. In addition, the repayment periods for secured loans are often longer, which might be advantageous for borrowers who’d benefit from spreading out their payments over a longer period.

Types of Secured Loans

There are several types of secured loans that might help you distinguish between a secured and an unsecured loan. Each secured loan has unique features and requirements. Some of the most common types include:

Mortgage Loans

To buy or refinance a property, most people take out mortgage loans, which are long-term financial arrangements. If you default, the lender may use their right to foreclose on your property. Interest rates on mortgage loans are often fixed or adjustable, and loan terms may be anywhere from 15 to 30 years.

Car Loans

Cars are used as collateral for auto loans. The loan duration for these loans is three to seven years, and the interest rate structure can be either fixed or variable. Your credit rating and the amount you borrow may determine the interest rate you’re given. The lender might take back the vehicle if you fail on a secured auto loan.

secured vs unsecured loan

Home Equity Loans

Your home’s equity might be used as collateral for a loan. Equity refers to the surplus after subtracting the mortgage balance from the home’s market value. Standard terms for these loans range from 5 to 15 years and have fixed interest rates. If you fail to repay your home, the lender can foreclose on your house. 

What Are Unsecured Loans and How Do They Work?

Unsecured loans require more information about your credit score, income, and work history to decide whether to approve your loan application.

One of the best things about unsecured loans is that you don’t have to put up anything as collateral. You don’t have to worry about losing your property if you can’t make payments. Lenders see unsecured loans as riskier and usually have higher interest rates than secured loans. 

Types of Unsecured Loans

There are several types of unsecured loans, each with unique features and requirements. Some of the most common ones are:

Personal Loans

Personal loans are quite versatile, and you can use them for consolidating high-interest debt, financing home improvements, covering medical bills, or unexpected expenses. Personal loans come with fixed rates, which means the interest rate and monthly payment amount will stay the same throughout the loan term.

unsecured vs secured loan

Credit Cards

Credit cards allow users to make purchases, pay bills, and get cash advances up to a predetermined credit limit. Credit cards typically charge interest on the unpaid balance, known as the Annual Percentage Rate (APR), which can vary based on the card issuer, credit score, and payment history.

Student Loans

Student loans are made to pay for college costs, like school fees, supplies, and living costs. Private student loans are pricier than other loans, and you’ll need a good credit score or a co-signer to qualify.

Wrapping Up

When it comes to secured and unsecured lending, it’s crucial to borrow responsibly and only take on as much debt as you can comfortably pay back. By knowing the difference between unsecured and secured loans, you can choose the one that fits your needs best.

Was the guide helpful? Check out these extra resources to delve deeper: