When it comes to borrowing money, it’s important to understand all aspects of the loan – not just your payment amount, interest rate, and number of payments to be made. There are many different types of loans including personal loans, auto loans, consolidation loans, mortgages, home equity, etc., however they all fall into one of 2 categories: secured or unsecured.
Secured loans are backed by collateral i.e. something of value. When you are approved for a secured loan, your lender will either hold the title or deed to your home or automobile OR place a lien on it until you pay the loan of in full. Other items can be used to back a loan too, like stocks, bonds, or other personal and business assets.
Secured loans typically have higher borrowing limits and are the most common way to borrow large amounts of money. They typically have lower interest rates than unsecured loans.
Secured loans are not just for new purchases. Secured loans can also be home equity loans or home equity lines of credit. These are based on the current value of your home minus the amount still owed. These loans use your home as collateral. Other examples include mortgages and auto loans.
Unsecured loans are not backed by any collateral – meaning the lender has no asset to sell to recoup some of the loan debt. They typically have higher interest rates and a lower borrowing limit since the lender faces a higher level of risk of repayment. Borrowers tend to need a higher credit score than a secured loan to get approved.
If you fail to repay your debt, your lender can put your account into collections and take legal action against you to recoup some of the debt. A civil judgment could be filed against you that along with the late and missed payment can affect your credit score and future potential borrowing. Some examples of unsecured loans are credit cards, consolidation loans, and personal loans.
There are pros and cons to each loan type, and it can vary by borrower and lender. Whether a secured or unsecured loan is right for you depends on several factors, including how much you need to borrow and your credit score.
Secured loans can allow you to borrow larger amounts of money at lower rates, since the lender can be more confident, they won’t lose money even if you default. However, you do put your property at risk if you fail to pay. Unsecured loans don’t put property at risk, but they can be more difficult to get and can have higher interest rates and typically, shorter terms.
Need help figuring out the right type of loan for your needs – give us a call – we’d love to help!
Senior Vice President, Chief Lending Officer