Understanding the differences between a secured and unsecured loan will help you decide the best route for your finances and what type of loan you need to reach your goals. These are often necessary when you want to purchase something like a car or house or need a personal loan for an emergency. Here’s how to decide between the two.

What is a Secured Loan?

A secured loan is usually something like a mortgage or car loan – it’s for something tangible or specific. The loan acts as a lien on the item until the purchase is paid off. This means, in the event of non-payment, the lender can seize, foreclose on, or repossess the item. Compared to unsecured loans, secured loans tend to have lower interest rates, longer repayment terms, and the ability to borrow more.

Secured loans can generally be used for

  • Stocks

  • Investments

  • Cars

  • Motorcycles

  • Boats

  • Bank accounts

  • Homes

  • Commercial real estate

  • Other real estate

  • Jewelry

  • Antiques

  • Other collectibles

  • Secured credit cards

    • These require a refundable deposit when you open an account.

  • And other large purchases

What is an Unsecured Loan?

Unsecured loans require no collateral – the lender is taking a risk by loaning you money, but believe you, based on certain criteria, you will be able to pay it back with interest. Whether you can receive an unsecured loan depends on your credit score, credit history, income, debt, and other factors. The terms, such as interest rate, fees, and repayment length, also vary from lender to lender (such as a bank or credit union).

A few examples of unsecured loans include

  • Some credit cards

  • Personal loans

  • Student loans

  • Home improvement loans

Which is Right for You?

Usually, your specific need for a loan will dictate which loan option is right for you. However, before you decide on either the unsecured or secured loan, you will have to research your choices. This means reviewing interest rates, repayment details, fees, and other terms you’re agreeing to before signing the dotted line.

And remember: just because you can take out a loan, doesn’t mean you have to. You will end up paying more back in the long run due to interest rates and it can affect your credit, so you will want to review all your options before taking one out. You should only be borrowing what you can afford to pay back.

Working with a lender, such as a bank or credit union, can help you make the best decisions for your financial accounts, loans, and savings. Talk it over during consultation and decide what loan or financial route would be best for your goals. Make sure you also speak to more than one bank as you may get a better deal at another financial institution than the first one you receive.