What is the difference between a secured loan and an unsecured loan?
Question
Mike Lawson
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Answer ( 1 )
The primary difference between a secured loan and an unsecured loan has to do with collateral. A secured loan requires collateral. Here is some more information about the two different types of personal loans.
Secured Loan: A loan backed by collateral. It’s an asset the borrower pledges to the lender. Some examples of collateral include: Real estate, vehicles, savings or investments, and cryptocurrency or NFTs are used as collateral if you’re dealing with a Web3 institution or web3 friendly lender.
Why does the lender or ‘borrower’ want collateral? If the borrower fails to repay, the lender can seize the collateral to recover the debt.
Interest rates with secured loans are typically lower because the lender’s risk is mitigated by the collateral.
The Loan amounts are often higher due to reduced risk for the lender or your ‘collateral.’
With collateral, a borrower’s eligibility increases. It’s usually easier to qualify for personal loans, especially for borrowers with poor credit, as collateral reduces the lender’s risk.
Unsecured loans are loans that are not backed by collateral. Loan approval is based solely on the borrower’s creditworthiness and financial profile. These loans are harder to get and more costly unless you’re borrowing from the government for college or for healthcare.
Examples of unsecured loans include personal loans, credit cards, student loans, dental or healthcare credit cards.
Because a lender has no assets that they can seize if you or ‘the borrower’ doesn’t pay their bill, the lender has much more risk. Failure to pay can result in legal action and damage to your credit score.
Interest Rates for unsecured loans are usually higher because the lender assumes more risk without collateral. (not always the case if you’re wealthy or ‘well-off’ and have amazing credit)
The loan amounts are often smaller than secured loans due to increased risk for lenders.
If you get a larger loan i.e. over $1,000, you likely have good credit and excellent credit if you get approved for more. Unsecured loans are just like credit cards, based on your credit and if you make the lender money or pay on time always, you’ll get approved. Most people will get higher limits on credit cards then they’ll see on unsecured loans.
If you want an unsecured loan, make sure you have stable income.