Unsecured Loans vs Secured Loans

Advantages and drawbacks

These loans tend to be riskier for lenders. With secured loans, there's some asset the lender receives if the borrower fails to pay back the loan, but unsecured loans are based solely on the credit of a borrower, and are usually only given to those with a high credit score or with a credit worthy co-signer. Unsecured loans also tend to come with higher interest rates to offset some of the risk for the lender.

The lack of collateral does reduce the amount of paperwork required for an unsecured loan, although it's not as low as an advance on expected pay. They're also for smaller amounts and last for shorter terms, but can be used for almost any expense, from debt consolidation or covering medical costs to even something as frivolous as a dream vacation.

When should you consider an unsecured loan?

Unsecured loans are generally intended for borrowers who need fast cash and don't have any sizable collateral to put up. The reduced paperwork results in a faster turnaround for borrowers, allowing for fast management of debt problems or unexpected expenses. It's also a great solution for those who are expecting cash soon, but need the money now (such as homeowners that recently sold their property and are waiting for the money to come through, or a person that intends to sell an asset to cover costs but cannot wait).

They're also perfect for anyone with large credit card debt, since the interest rates are fixed and there's fewer penalties for missing a payment. These loans also get discharged if you later have to declare a Chapter 7 bankruptcy, while most secured loans still need to be paid back.

Applying for an unsecuring personal loan

Applicants have to complete the appropriate paperwork (which varies by lender). This generally involves authorizing lenders to check their credit and providing proof of income, usually a pay stub or W-2. Your credit score and history are vitally important in this process since there's no collateral.

Once the paperwork is complete, underwriters (both human and AI) will review your application and make a decision. You are then notified either way, and if you applied online, the money is transferred directly to your bank account.

Shop around

A large number of agencies offer unsecured loans, including banks and finance companies. Each lender will offer different terms, so the best move is to shop around and see who is offering the best interest rates for you before committing. Specifically focus on the interest rate and any fees the company will charge, as that affects your total payment and how long the loan takes to repay. Be sure to check for early repayment penalties as well, since you'll want to pay off your debt early in the event of a windfall.

Exercise caution!

There are plenty of reputable lenders who provide loans for those with good credit, and in some cases they'll even take borrowers with bad credit with a co-signer. However, there are plenty of shady lenders who will give a loan to anyone desperate enough for the money.

These lenders will often disguise payday or title loans as unsecured loans that don't require a credit check. They'll offer a very short term loan with a very high interest rate, but all they're really after is a piece of your paycheck or your property. Be especially wary of ads making huge promises- loans are not a magic fix, they are a temporary solution.

Typical rates and terms

Unsecured loans usually have payment plans that last between two and five years. You receive the loan as one lump sum, then pay it back in equal payments based on the term, total money lent, and interest rate. Most unsecured loans have fixed rates, but some function as revolving credit (like a credit card), and can be drawn on as needed with interest charged on the credit that has been used.

Rates vary from lender to lender and borrower to borrower, but in 2014, those rates ranged from about six percent for borrowers with good credit to about forty percent for those with the worst credit.

Unsecured vs Secured?

While the difference has been covered above, it is important to know which loan you're receiving. The primary difference is collateral, and each loan type has its purpose.

  • Unsecured Loans

    • Does not require collateral
    • Lower loan limit with higher interest rate and requires higher credit
    • With no collateral put up, is based almost entirely on your credit
    • Most common unsecured loans are credit cards, personal loans, and student debt
  • Secured Loans

    • Requires some asset be put up as collateral, which will be seized if you fail to repay
    • Higher borrowing limit and easier approval due to reduced risk for lender
    • May be easier to get if you are denied for an unsecured loan
    • Most common secured loans are car notes and mortgages