When you’re in the midst of the research for a loan, you may come across the terms â€œsecuredâ€ and â€œunsecured.â€ Which you should opt for will become clear once you know exactly what you’re using the loan for. Here’s a rundown of what you need to know about both.
What Do You Need the Loan For?
The easiest way to answer the question, â€œShould I get a secured or unsecured loan?â€ is to first consider what you need it for.
Secured loans are for something specific and require collateral. Two popular examples of one are mortgages and car loans, but they can also be used for investments, boats, commercial real estate, and collectibles. If you fail to pay back the loan, the bank or credit union could repossess the property or item you purchased.
Unsecured loans on the other hand are for something less tangible, like personal loans, home improvement expenses, and student loans. They are granted on certain criteria and can be based on your income, credit score, repayment history, and debt.
Knowing what each is for should make it more clear cut which one you’ll need to apply for.
Before You Sign
Before you sign for either a secured loan or an unsecured loan, it’s essential to do your research. You want to be sure you’re getting the best loan for your finances as well as your purchase, whether that’s a car or home improvement services.
Explore Your Options
Your bank is an excellent starting point when it comes to searching for a loan but one application shouldn’t be the end of your search. There are other lenders out there and they may come with better interest rates, more optimal repayment terms, and lower fees. Applying to a few different lenders, including banks and credit unions if you qualify, will help ensure you’re getting the best bang for your buck and not spending more than you need to in the long run.
Review The Terms Carefully
Loans from different lenders will, of course, be different. Reviewing the terms carefully before you sign will help ensure it’s not coming with any surprise fees or higher interest rates than you expected. Always read before you sign and fully understand your loan before you take it on. If you have questions, don’t hesitate to ask the lender.
Ask: Do You Need the Loan?
Although a loan can sometimes feel like free money (at the start, anyway), it isn’t. It’s essential to ask yourself if you really need the loan. You will have to pay it back and you should only take out the money you’re sure you can afford to pay back. A car may be a necessary purchase, but it’s generally not recommended to use a loan for jewelry, vacations, or similar purchases. It’s a better idea to save up for these expenses.
Understanding whether you need an unsecured or secured loan should become clear once you understand what you need the loan for. If you’re still confused about which loan may be the best for you, you should talk to your bank to review your options.