Let’s face it: at some point in your life you will probably have to borrow some money. Whether to finance a new car purchase, pay for your kid’s braces, or buy a new home there are times when you will need to get money from an outside source. If a friend or a family member agrees to lend you the money, then that is good for you. However, most loans are with financial institutions such as a commercial bank, a credit union, or with a mortgage company. Not all loans are the same, but all loans fall into one of two categories: they are either secured or unsecured loans. Keep reading and we’ll compare and contrast these two loan categories.
A secured loan is a loan that is backed by collateral. This means that in exchange for a loan, the lending institution will put a lien on something else that you own. For example, if you want to borrow $5000 for a used car, the lender may require that you put your $6000 stamp collection up as collateral. No, you won’t have to turn the stamp collection over to the lender until the loan is paid off, but you will be expected to turn it over should you default on your payments. A secured loan is considered to be a less risky loan and loan rates are historically much lower than an unsecured loan.
An unsecured loan is a loan that has no collateral to go with it. Essentially, the lender is taking a risk that you will pay back in “good faith” your loan and he is going out on a limb to lend money to you. It could be that your lender sees your excellent credit rating and believes that you are a low risk borrower. Even if you have bad credit, a lender might still be interested in allowing you to borrow money. In this case your interest rate will be very high, perhaps 20% or more depending on your state or province’s restrictions.
Secured loans are usually include mortgages where the home is the security or for a new car where the automobile is the security there. Unsecured loans typically involve most credit cards and some personal loans. Student loans are unsecured loans as well.
Naturally, if you want to save on interest then a secured loan is the way to go. However, if you don’t have the collateral and there is a lender willing to give you the money, then an unsecured loan could be of value to you. Just remember that the highest loan interest rates are always with an unsecured loan.
Adam Heist is a freelance writer with many years of experience writing articles on
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