Unsecured Loans vs. Secured Loans, What’s the Difference?

Many people think that getting a loan is as simple as going to the bank, filling out an application and getting approved. In reality, the process is more complex than that. Those who have an excellent credit score can typically get a loan easily while those with poor credit will struggle to get the funds they need. A big part of overcoming this challenge is understanding the difference between unsecured personal loans and secured bad credit loans. The following outlines the benefits and disadvantages of each one and what consumers need to know about their credit reports and the impact of their scores.

Unsecured Personal Loans

Also known as consumer loans or simply unsecured loans, this type of loan is attractive to those with bad or poor credit because there is no requirement for collateral, such as a home, vehicle or other valuable asset. This makes borrowing money less risky for the applicant. Getting approved is tied to the person’s credit score and history, not what they own. While unsecured loans carry higher interest rates than a secured loan, it is often a better alternative than putting personal property at risk if the loan is not repaid.

Secured Personal Loans

A secured personal loan is the type many people associate with borrowing money, and it is often tied to projects like home remodeling, big events like weddings and graduations along with other life milestone expenses. Passbook loans, mortgages and car loans are other examples of secured loans. Secured bad credit loans, that come with lower rates of interest, requires collateral and presents less risk to the lender. It is a higher risk to the borrower because an illness, job loss or other unexpected change in life circumstances can cause late or missed payments, leading to the lender selling the property to recover the loan money.

Why Credit is Important

Regardless of whether a loan is unsecured or secured, credit is very important because the score will determine whether an individual is an acceptable risk for a lender. Credit history is used as indicator of repayment and will set the terms and interest rate for the loan. It all comes down to meeting a particular lender’s requirements. All consumers are allowed by law to obtain a free copy of their credit reports from Annual Credit Report. These reports should be checked for any errors or discrepancies that could prevent being approved for a loan. Since one in five people in America have mistakes in their credit reports, it is worth investing the time to ensure there is nothing standing in the way of getting needed funds.

Getting a Loan

Secured loans are usually obtained through banks and credit unions, but unsecured loans are a different matter. The best place to start searching for these loans is online. While looking for a lender, it is best practice to read all of the terms and requirements, as some lenders can be predatory and keep a person in an endless cycle of debt. Always go with the ethical choice, even if it costs more. Getting a loan should be about reducing debt, not making it worse.