In November 2020, US consumers owed over $4.16 trillion in consumer debt. More than a third of that ($3.2 trillion) was for non-revolving debt. Such credit types include student loans, auto loans, and personal loans.
Moreover, experts predict consumer debt to further increase in the first half of 2021. They project auto loan originations to rise by 14.6% and secured and unsecured personal loans by 62.3%.
With all that said, you may now be wondering what the difference between a secured and unsecured loan is. You’d want to know this before you even apply to determine if you meet their varying requirements.
On that note, we created this guide comparing secured vs. unsecured loans. Read on to discover what they are, how they work, and which one may be a better choice in your case.
A Primer on the Key Difference Between a Secured and Unsecured Loan
A secured loan requires collateral, which serves as a security against the loan. By contrast, unsecured loans only expect a borrower to pay back the loan based on their signed “oath.” That’s why unsecured loans are also sometimes referred to as “signature loans.”
What Is a Secured Loan and How Does It Work?
A secured loan is a loan secured by a pledged asset, also known as “collateral.” Collateral is any asset of value that secures the repayment of a loan. It serves as a “back-up” payment for a loan.
Some of the most common types of collateral are motor vehicles and real estate property. Auto loans and mortgages, in turn, are two of the most common forms of secured auto loans.
Lenders can seize and sell pledged assets when borrowers fail to pay back a secured loan. Lenders then use the proceeds of the sold property to recoup the money they lost.
The upside is that secured loans are typically easy to get, as lenders have a way to recover their money. However, secured lenders still need to look into borrowers’ credit reports. You can still qualify for a secured loan if you have a bad credit score, but you can expect a higher interest rate.
What Is an Unsecured Loan?
Suppose you’re looking for personal loans in Layton, but you don’t have an asset or don’t want to pledge one. In this case, consider going with an unsecured loan, as it doesn’t require collateral.
Unsecured lenders only rely on the borrower’s signed loan contract and repayment promise. Meaning, they won’t have any right to seize or sell any of your property if you don’t pay back the loan. However, they have the right to call you, so long as they follow the Fair Debt Collection Practices Act.
As there’s no collateral, unsecured loans can be more difficult to get than secured loans. Traditional unsecured lenders have stricter credit score, employment, and income requirements.
Make the Right Choice Between a Secured and Unsecured Loan
As you can see, the chief difference between a secured and unsecured loan is the need for collateral. Pledging an asset for a secured loan makes you a lower-risk borrower, so you may also enjoy a lower interest rate. If you don’t want to risk losing your property, though, then it may be better for you to apply for an unsecured loan.
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