For consumers in need of fast and easy funds, personal loans are an attractive option for multiple reasons. For starters, they allow borrowers to choose fixed monthly repayment plans that suit their budget, as opposed to racking up compounding, high-interest credit card debt.
Furthermore, the advancement of online p2p (peer-to-peer lending) has made it easier for people all across the (link: /learn/articles/understanding-the-credit-score-spectrum text: credit spectrum) to get approved for personal loans, and at competitive rates, with funds available as early as the next business day in some cases. For these reasons and more, personal loans are now the (link: /learn/articles/personal-loans-are-the-fastest-growing-consumer-lending-product text: fastest-growing consumer lending product).
While there are many ways to distinguish different lending products, including how the interest is structured, it’s especially important to know the difference between secured and unsecured personal loans. Whether a loan is secured or unsecured has a great impact on the type of offers a consumer can get, but also weighs heavily on what will occur if they’re unable to repay the loan.
Interested in a personal loan to fund a big purchase or consolidate debt? With Fiona, you can compare personalized loan offers for secured and unsecured loans all in one convenient place.
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What Is a Secured Loan?
Before describing what a secured personal loan is, it’s important to know what a secured loan means in the greater context of lending. Both a mortgage and an auto loan are examples of secured loans, in that they are backed by the asset in question. In other words, if you fail to make payments for a mortgage or auto loan, and the loan goes into default, your home or car acts as collateral and can be repossessed by the lender.
Since personal loans can typically be used for any intended purpose, whether it’s a large purchase or to consolidate/refinance preexisting debt, it is more difficult to tie down one asset as collateral. As a result, secured personal loans are backed by a specific asset at the onset of the lending process. The most common type of collateral for a secured personal loan is a car, but other options can include a home, bank account, stock investment, or high-value personal belongings, like precious metals and jewelry. A lender will typically require the title/deed for the collateral or place a lien on the asset until the loan is paid in full.
What Is an Unsecured Personal Loan?
While secured loans are backed by collateral, unsecured loans are not. The majority of personal loans are of the unsecured variety, which allow borrowers to gain access to funds without the need for a big ticket asset (like a car or home) to finalize the application process. Instead, an applicant’s creditworthiness will be the biggest factor as far what type of personal loan offer they can get and if they will ultimately be approved.
However, while unsecured personal loans do not have assets in place as collateral, lenders still have avenues to recoup their money in the event a borrower cannot repay and the loan goes into default. Lenders can pursue action through a debt collection agency or even a lawsuit against the borrower. Resulting consequences can include a borrower having their wages withheld, their property seized, or their business declared bankrupt.
What Are the Pros and Cons?
With secured loans, the obvious con is having to tie a personal asset as collateral. While a borrower may feel fully confident in repaying their loan at the onset, a sudden decrease in income or other event can change that and put their collateral at risk. On the pro side, secured loans typically offer lower rates and higher borrowing amounts than secured loans, since the lender is taking on less risk. Furthermore, borrowers with poor credit may find it easier to get approved for a large personal loan if they have an eligible asset to include as collateral.
As for unsecured loans, there is less risk as far as collateral is concerned, but as stated above, unsecured loans do not protect borrowers entirely in the event of a default. Nonetheless, applicants who don’t have a home, car, or other valuable asset to declare as collateral can obtain an unsecured personal loan by exhibiting good credit habits. While applicants with poor credit scores may have to pay more in interest and won’t be eligible for certain amounts, those with good to great credit scores will have more options available.
As illustrated above, there are certain advantages and disadvantages to both secured and unsecured personal loans. A lot of factors will go into an applicant’s decision on which option is best for them, as far as how much they want to borrow, what type of rate they can get, and if they feel comfortable putting up an asset as collateral.
With Fiona, users can get matched with personalized loan offers that suit their needs, for both secured and unsecured loans. Try Fiona today, and see what options are available for you.
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