Secured vs. Unsecured Loans
When searching for fast funding and deciding which borrowing option is the right fit for you, it’s important to understand secured loans vs. unsecured loans. If you are looking at a payday loan, mortgage loan, car title loan, or personal loan, whether or not you will use collateral to secure the loan can impact the application and repayment process.
Secured loans are typically less risky for lenders because the borrower must pledge a valuable item as collateral to guarantee the loan. For unsecured loans, you are not required to provide any collateral during the application process. However, depending on the type of unsecured loan you decide to apply for, getting approved for funding can be a bit more challenging if your credit score is below average.
Keep reading to understand more about secured and unsecured loans so that you can hopefully find the most convenient option to get emergency funding!
What Is a Secured Loan?
Some of the major characteristics associated with secured loans include the following:
- Collateral Requirement: The type of collateral you are required to use in order to secure the loan depends on the type of loan you decide to apply for. With mortgage loans and home equity loans, the collateral for the loan is the borrower’s house. For title loans and auto loans, the borrower’s vehicle is the collateral for the loan. In order for a car or home to qualify as collateral for the loan, it must have a qualifying amount of equity.
- Accessibility: Secured loans, such as car title loans, are often more accessible to individuals with bad credit because the borrower is required to use a qualifying asset as collateral to guarantee the loan.
- Risks: Another factor to be aware of when applying for a secured loan is that it is important to keep your loan in good standing. If you miss payments or default on your loan, the lender may repossess the item you pledged as collateral for the loan.
What is an Example of a Secured Loan?
Examples of secured loans range from car title loans to mortgage loans. A mortgage loan is a type of secured loan used to purchase a home or property. A car title loan is a vehicle-secured personal loan that allows you to borrow against the value of a vehicle. Other examples of secured loans include home equity loans, auto finance loans, and secured business loans.
Why Would Someone Want a Secured Loan?
People want secured loans for various reasons. In the case of auto loans, a borrower likely needs transportation and cannot afford to pay for the entire cost of the car upfront. For home equity loans, a borrower is essentially tapping into the available equity in their home to handle urgent expenses or financial obligations. With a secured loan like a title loan, a borrower may need fast cash to deal with overdue bills, and they may not have an emergency fund to rely on when times get tough.
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What is an Unsecured Loan?
You do not need to provide any collateral to take out an unsecured loan. But, the trade-off is that it may be harder for some borrowers to qualify for unsecured loans because they do not have a strong credit history. Some of the main factors that lenders will consider during your application for an unsecured loan are the following:
- Your Credit Score
- Your Income
- Debt-to-Income Ratio
The less debt you have and the higher your credit score, the more likely you will receive approval for a personal loan with low interest rates. Unsecured loans tend to have stricter credit requirements, but there are exceptions, like payday loans.
Payday loans are unsecured loans that are meant to give borrowers a little bit of financial relief between paychecks. The average payday loan amount is around $500 and payday loans are known for their high fees and short repayment terms.
Typically, unsecured loans are used for debt consolidation or unexpected bills, but they can cover a wide range of personal expenses.
Pros and Cons of Secured and Unsecured Loans
There are pros and cons of applying for secured loans vs. unsecured loans. Generally, secured loans are easier to qualify for, and in some cases, you can access more funds than you would be able to through an unsecured loan.
Another advantage of secured loans is that you can still use the item you pledged as collateral for the loan during the repayment process. For example, with title loans, as long as you are making timely payments on your loan, you can keep driving your car. That being said, the main potential risk associated with secured loans is repossession. If you default on your mortgage or auto loan, your home or car could be repossessed by the lender or the applicable financial institution.
Unsecured loans tend to have stricter credit requirements than secured loans because they pose a greater risk to the lender. Individuals struggling with their credit score may find it difficult to qualify for an unsecured personal loan. If they do qualify for an unsecured loan with bad credit, their interest rates can be higher, which means they will pay more to borrow money from a lender.
In terms of advantages, unsecured loans do not require you to use a car or home to secure the loan, so you don’t need to have a qualifying asset to get approved for funding. While defaulting on this type of loan can significantly impact the borrowers’ credit history, they will not have to worry about losing their collateral if they can’t repay their loan.
What is Better – A Secured or Unsecured Personal Loan?
When it comes to choosing a secured vs an unsecured loan, the right choice for an individual depends on their own personal financial situation and preferences. Some questions to ask yourself when trying to decide on the right type of loan for you include:
- What is the purpose of my loan? Consider the purpose of your loan before you submit an application. Why do you need funds? Do you need to finance a vehicle or get emergency cash to get back on your feet? For example, if you need money for unexpected expenses and you do not have good credit, then using a secured loan like an auto title loan can be a convenient option.
- Do I have collateral available? For some secured loans, like car title loans, you will only be able to qualify for the loan if you meet the lender’s requirements and have a car or truck with enough value.1
- Can I qualify for a loan without collateral? If you have a high credit score and verifiable income, then a personal loan can be a reasonable option to consider when you need funding. You may not need to use collateral to secure the loan and offset your credit risk.
The decision to apply for secured or unsecured loans ultimately depends on why you need funds, your potential eligibility for the loan, and your personal preferences.
Apply for Vehicle-Secured Loans or Unsecured Loans
Now that you understand more about secured loans vs. unsecured loans, you may be ready to submit an application. If you want to apply for a quick and convenient secured loan like a title loan serviced by LoanMart, the good news is that you can get started immediately! Just fill out a quick questionnaire online at your convenience to instantly find out if you are pre-approved for a loan against your car.1
There are many advantages that come with qualifying for a title loan serviced by LoanMart, such as:
- Exceptional Customer Service: From the online customer portal to the friendly loan agent taking your call, you may find that applying for a title loan serviced by LoanMart comes with quality customer service and convenience.
- Competitive Interest Rates: If you are eligible for a car title loan serviced by LoanMart, you can access perks like competitive interest rates and flexible loan terms!
- Transparency and No Prepayment Penalties: You can expect transparency throughout the entire application and repayment process! There are no hidden fees.5 Additionally, if you are able to pay off your title loan before the end of the loan term, you will not deal with a prepayment penalty.
Don’t wait to apply for the financial assistance that you need. Complete a short questionnaire online or call 855-422-7412 to speak with a LoanMart loan agent today!
