Secured and Unsecured Loans: Which is Better

At one point or another, it is necessary to borrow money from a bank, a credit union, or another type of lender to help offset some of life’s major expenses. A big purchase like a car or a home, or an unexpected bill require cash on hand, and when it isn’t there, taking out a loan is one of the few options most consumers have to make ends meet. Not all loans are the same, though, as many have different qualification requirements, repayment terms, and costs. Understanding the two basic types of loans and the financing options that fit into each category is beneficial for consumers who need to borrow money quickly.

Secured Loans for Bad or No Credit

The first broad category of borrowing is a secured loan. This type of loan is backed by collateral, like a home or vehicle, or by bank accounts like a savings or money market deposit. A secured loan is tied to that asset, meaning the lender offering the loan has the right to take possession of the pledged asset should the borrower fail to repay. Because there is an asset involved in the transaction, secured loans for bad credit often come with lower interest rates and easier qualification requirements than their unsecured counterparts.

Secured loans may also come in the form of financing that does not require any check of credit history or score. San Diego title loans are an example of this type of borrowing, designed for borrowers who may have poor credit. With a car title loan, the vehicle works as the asset to secure the loan, eliminating the need to based qualification on one’s credit history or score. It is important to note that while this type of secured loan is helpful for borrowers who need cash quickly, the lender may take ownership of the car title should the loan go unpaid.

Unsecured Loans for Strong Borrowers

Opposite of secured loans are unsecured loans – financing solutions that do not require any type of collateral as part of the agreement. Instead of using a home, vehicle, or savings account as the basis for how much an individual may borrow, lenders offering unsecured loans base approval of an application on the borrower’s credit history and score. This means that an unsecured loan has more stringent qualification requirements, leaving this as an option only for those with a strong financial track record.

Unsecured loans often carry higher interest rates than secured loans because of the amount of risk involved with lending money to a borrower based only on his or her credit history. Fortunately, unsecured loans still provide a predictable strategy for financing a big ticket item, as they typically have fixed interest rates, a set monthly payment, and a repayment period that can extend up to several years. Each lender has different requirements for qualifying for an unsecured loan, so it is important for borrowers to shop around before selecting the loan that’s right for them.

Both secured and unsecured loans can be sound strategies for financing a major purchase or an unexpected bill. Secured loans are best suited for individuals who have assets on hand or those who have less than perfect credit, while unsecured loans may be beneficial for borrowers who have a strong credit history. Regardless of the type of loan selected, borrowers should take time to understand their ability to repay the loan each month per the terms of the loan agreement.

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