Secured vs. Unsecured Loans: Pros and Cons

iQuanti: There are plenty of factors you should weigh when shopping around for a loan. One important thing to consider is whether a secured or unsecured loan is right for you.
The main difference between these two types of loans is simple. Secured loans require collateral, or an item that secures the loan, such as a house, car, or piece of jewelry. Unsecured loans, on the other hand, do not require collateral.
There are several benefits and drawbacks for both loans, making each type suitable for different borrowers and situations. Read on to discover the pros and cons of secured vs. unsecured loans. 
Pros of secured loans
Lower credit requirements
Secured loans can be great for borrowers building or rebuilding their credit because many lenders offering secured loans will accept borrowers with lower credit scores. Your collateral can offset some of the lender’s risk since they’ll still get something of value if you default on the loan.
Better terms
Lenders have less risk to deal with when collateral is at stake, allowing some to offer better terms. As a result, you may be able to secure a larger loan, lower rates, and longer repayment periods.
Cons of secured loans
Collateral at risk
Lenders ask for collateral on secured loans to recover some losses if you default. They can legally take ownership of your item if that happens. This may not be a big concern to you if your item is less valuable, but it can be a bigger deal if you used your vehicle or home as collateral.
You may get a lower maximum loan amount
Secured loans tend to base the loan amount on the value of your collateral. For example, if you have a $1,000 piece of jewelry, you may only get approved for a loan worth a percentage of that amount. This means you may need to put down more valuable assets to get a larger loan.
Pros of unsecured loans
No asset risk
One major benefit of unsecured loans is you won’t have to risk anything valuable, such as a house, car, or piece of jewelry.
Faster application process
Lenders generally have to appraise collateral for secured loans, which may lead to a longer application process.
Luckily, this isn’t an issue with many unsecured loans. Unsecured loan applications often take just a couple of minutes to complete, and you may get approved instantly or quickly, depending on the lender.
Cons of unsecured loans
Some loans can be harder to qualify for
Some lenders have stricter lending criteria for unsecured loans since they won’t have financial recourse if you default. For some loans, you may need a higher credit score for approval.
Less favorable terms
The lender takes on more risk when approving borrowers for unsecured loans since you don’t have to put down collateral. As a result, you might receive less favorable terms compared to a secured loan.
Should I get a secured or unsecured loan?
When deciding whether to choose a secured or unsecured loan, remember that the right option for you depends on your financial situation and needs. 
Borrowers who don’t mind using an item of value they own as collateral may do well with a secured loan. They may be able to get favorable terms and can then make consistent payments to raise their credit score.
On the other hand, borrowers who want to borrow money without putting down collateral can consider taking advantage of unsecured loans. Regardless of the loan type you choose, make sure you can pay it back before you apply.
Notice: Information provided in this article is for information purposes only. Consult your financial advisor about your financial circumstances.
Source: iQuanti, Inc.