Secured And Unsecured Loans Explained

by: John Mussi

When planning to pay for a wedding, many financing arrangements may have to be considered.

What Are Secured And Unsecured Loans

Finding the right loan for you and your financial needs is important. After all, you don't want to pay any more for your loan than you absolutely have to. When shopping for a loan, however, you might find yourself facing a decision between applying for secured and unsecured loans.

If you're not entirely sure what the difference is or which type of loan is right for you, then the information provided below should shed a little bit of light on these two different types of loans and when the best time is to use each.

Defining Secured Loans

Secured loans are called this because they use collateral (which is some item of value that can be sold to recover the money that has been borrowed if the borrower is unable to repay the loan) as security to guarantee the repayment of the loan. As a result of the collateral that is used to secure the loan, banks and other lenders are usually more willing to grant lower interest rates for secured loans. The interest rate offered depends upon the credit rating of the person applying for the loan as well as the value and ease of finding a market for the item used as collateral.

Defining Unsecured Loans

As the name might imply, unsecured loans are loans that do not use collateral as a guarantee that the loan will be repaid. Because of this, unsecured loans are much more likely to have a higher interest rate. These loans are still advantageous, however, since there is no collateral that could be seized and sold by a bank or other lender. Unsecured loans are generally given to individuals with good credit, though depending upon the amount to be borrowed there are some unsecured loans which are offered to individuals with less-than-perfect credit as well.

When To Use Secured and Unsecured Loans

When to Use Secured Loans

Secured loans can be used in a variety of different circumstances, especially in those cases where the individual who is applying for the loan doesn't have the best of credit. This doesn't mean that secured loans are used exclusively by individuals with bad credit; many people with good credit still choose to use secured loans for their needs because they can get a lower interest rate that way.

Additionally, some high-value items such as real estate and automobiles serve as the collateral for their own loan and therefore don't have much of an option aside from secured loans. The larger the amount to be borrowed is, the more likely you are to have to take out a secured loan to borrow it.

When to Use Unsecured Loans

Since they don't have the guarantee of collateral, banks and other lenders are generally much more careful when issuing unsecured loans. For lower-value loans, however, unsecured loans can be very helpful. Short-term loans that are unsecured can save on paperwork and remove the fear of losing your collateral, all the while not hurting you too much with a higher interest rate because of the shortened amount of time that it takes to repay the loan.

Though many lenders are hesitant to make unsecured loans to individuals with poor or bad credit, a thorough search can help you to find lenders willing to make unsecured loans to individuals regardless of their credit. This can be useful in catching up on some bills, consolidating them into the single unsecured loan payment.

John Mussi is the founder of Direct Online Loans who help homeowners find the best available loans via the website