Whether you need to cover an unexpected bill or want to plan your dream vacation, there is likely a personal loan suited to your needs. However, not all personal loans are built the same. Personal loans fall into one of two categories: secured loans and unsecured loans.
Secured loans require you to pledge collateral, and unsecured loans don’t. Collateral, a valuable asset you agree to forfeit to your lender should you fail to pay back your loan, can include:
- Your home
- Your car
- Savings accounts
- Investments
Which one you choose depends on your situation.
- Differences between secured and unsecured loans
- How to get a secured personal loan
- How to get an unsecured personal loan
- Common uses
- Secured or unsecured?
Differences between secured and unsecured loans
Collateral isn’t the only difference between secured and unsecured loans. Here is a table that illustrates the differences:
| Secured | Unsecured | |
|---|---|---|
| Minimum credit score requirements | Low to good credit | Good to excellent credit |
| Loan limits | Higher loan limits | Lower loan limits |
| Rates | Lower interest rates | Higher interest rates |
| Requires collateral? | Yes | No |
When choosing between a secured or unsecured loan, Harjas Sidhu, former head of personal and student lending at PNC Bank, advises: “Consumers should carefully consider their budget, credit score, interest rates, repayment terms, and potential penalties for early repayment or late payments before taking out a loan.”
How to get a secured personal loan
To get a secured personal loan, you’ll need to follow several steps:
- Determine how much money you need: Begin the process of getting a secured loan by figuring out how much money you’ll need to borrow and what you own that could qualify as collateral for a loan that large.
- Compare lenders: You’ll want to research credit unions, and online lenders. Use online comparison tools to get a quote for a personalized interest rate, as well as compare terms and fees side-by-side.
- Complete the application: Once you’ve settled on a lender, you’ll need to submit their loan application alongside any required documentation. During this process, you’ll need to let your lender know what asset(s) you plan to use for collateral.
- Collateral appraisal: Depending on the lender, you may be required to go through an appraisal process to confirm the value of your asset.
- Loan approval and disbursal: If your loan is approved, your lender will disburse your loan funds to you.
Other types of secured loans
Personal loans aren’t the only type of secured loan; other common secured loans include:
- credit score. A cash deposit secures these cards before a credit line can be extended.
Pros and cons of secured loans
Pros
- Lower interest rates: Typically, secured loans come with lower interest rates than unsecured loans since your lender is more likely to recoup their losses should you default.
- Higher loan limits: Since secured loans require valuable collateral, like homes and cars, they often come with high loan limits.
- Easier approval requirements: If you have poor credit, securing a loan with collateral can build your lender’s confidence in your ability to repay your loan. This can make it easier to be approved.
- Flexible repayment terms: Secured loans usually come with the option of long repayment terms, which are helpful if you need to spread out a large expense.
Cons
- You could lose collateral: If you don’t make your loan payments, your lender can take ownership of your collateral.
- Higher initial cost: Secured loans sometimes come with higher upfront costs, like collateral appraisal fees, down payments, and insurance premiums.
- Long-term commitment: Secured loans come with longer repayment terms, which can tie up your finances for a longer period and cause additional interest to accrue on your loan balance.
- Strict eligibility requirements: Although secured loans are more accessible than unsecured loans for some borrowers, lenders still require collateral, credit score, and income verification criteria to be met.
How to get an unsecured personal loan
Getting an unsecured personal loan is faster than getting a secured one. To get one, you should expect to:
- Determine how much money you need: When getting an unsecured loan, you’ll first need to determine how big of a loan you need and stick with your decision. You’ll want to resist the temptation of larger loan limits that could be offered to you.
- Compare lenders: Use an online personal loan comparison tool to compare multiple lenders at once. During this process, pay close attention to not only the loan application. Typically, this can be done online and in a matter of minutes. During this process, be prepared to provide personal and financial documents to your lender.
- Loan approval and disbursal: After you complete your application, you can expect a decision to be made on your loan rather quickly. If approved, the lender will disburse your loan funds directly to you.
Other types of unsecured loans
Other than personal loans, unsecured loans come in many different forms, including:
- Student loans: Student loans are unsecured loans that can be used for educational expenses, such as tuition and books.
- Unsecured credit cards: Unsecured credit cards offer borrowers a revolving line of credit that can be used for almost any purchase.
Pros and cons of unsecured loans
Pros
- No collateral requirements: Unsecured loans are granted based on your credit score and other factors, but they don’t require you to pledge an asset as collateral.
- Simple application: Unsecured loan lenders typically offer more straightforward applications than secured loans, with quicker medical bills.
- Can improve your credit score: When used responsibly, unsecured personal loans can help increase your score over time.
Cons
- High-interest rates: Unsecured loans have high-interest rates when you compare them to secured loans.
- Stricter eligibility requirements: Qualifying for an unsecured loan requires you to meet a stricter set of requirements than secured ones, including higher credit requirements and stable employment.
- Lower loan limits: Loan limits on unsecured loans are lower than those on secured loans, since there is no collateral to guarantee lenders that they will recoup their losses should you default.
- Credit score risk: If you don’t use your loan responsibly, you risk damage to your credit score, which could cause you to have a hard time taking out loans in the future.
Common uses
Personal loans can be used for many different purposes, some of the most common uses being:
- Home improvements
- Consolidating debt
- Large purchases
- Medical bills
- Weddings
- Education
- Business startups and expenses
It’s important to note that although personal loans can be used for almost anything, they do come with some restrictions:
- Secured loan restrictions: Secured loans are usually restricted to being used for the purpose that they were acquired. For example, if you take out a secured auto loan, you can only use it to purchase a vehicle.
- Unsecured loan restrictions: Unsecured loans offer more flexibility as far as what they can be used for. Although they can’t be used to pay for a down payment on a home, they can be used for most legitimate purchases.
To get a clearer idea of what you can and can’t use your personal loan for, you should contact your lender directly.
How to decide: secured vs. unsecured personal loans
When deciding to get a secured or unsecured loan, you should consider the following carefully:
- Your access to collateral: If you own valuable assets and are comfortable with possibly losing them, a secured loan might be a good choice for you. If you don’t, an unsecured loan is likely the better option.
- Your credit history and score: If you have bad credit, a secured loan might be your only option. If you have small loan and can qualify, an unsecured loan might be the better option.
- Interest rates: The interest rates offered by secured loans are generally higher than those of unsecured loans, but you’ll also want to factor in any additional fees that could negate savings on interest.