Secured vs. Unsecured Personal Loans

[Jul 6, 2009.]

 

Does it matter whether a borrower uses a secured loan versus an unsecured personal loan? That depends upon how much a person borrows and what the money is being used for. The following points will explain the differences between secured and unsecured loans.

Debt Is Debt

First, borrowing any type of loan means taking on new debt. Anytime a borrower can avoid taking on debt and pay cash for purchases they should. But in situations where a personal loan is needed, it's important to understand the differences between loan products.

Secured Personal Loans

When a borrower is asked to put up some type of property as collateral, they're dealing with a secured loan. Collateral can be a home, car, boat, or even undeveloped land. If the person stops making payments on a loan, the lender can repossess the property pledged as collateral. Larger loans tend to be secured because lenders want to minimize their risk.

With larger sums of money, the repayment period will usually be longer. It's not uncommon to find secured loans with terms ranging from five to 30 years. Of course the longer the repayment period, the more interest will be paid out over the life of a loan.

Unsecured Personal Loans

Secured loans tend to have lower interest rates than unsecured loans. That's because unsecured loans don't require collateral, so lenders are taking on more risks by lending money. Unsecured loans, such as credit cards, are heavily tied to a borrower's credit score, and can be difficult to get. So the better a person's credit, the more favorable the interest rate will be.

Using a Cosigner

Because of the credit crunch it has become difficult for many people to qualify for personal loans. A borrower may even be asked to find a cosigner. That person would be responsible for paying back the loan if the borrower is unable to do so. However, once a person qualifies for a personal loan—also called a signature loan—the money can be used for anything, such as home repairs, medical bills, or furniture.

Paying Back a Loan

So what happens if an unsecure personal loan isn't repaid? Without any collateral, a lender would have to file a lawsuit to recover the money. Depending upon the situation, a lender might be awarded some of the borrower's property or be able to garnish their wages, but that isn't always the case. To minimize their risks, lenders often restrict unsecured personal loans to amounts under $5,000.

 

About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.