While some people go for a cash-only lifestyle, most of us rely on credit to pay for the high cost of living over time. If you’re looking to buy an expensive item like a house or car, start or expand a business, remodel a kitchen, or pay for a college education, you can apply for a loan at your local office or online to cover the cost.
When considering your loan options, you may have to choose between a secured and an unsecured loan. Secured loans require you to put up something of value that you own as collateral in case you cannot repay your loan, while unsecured loans allow you to borrow money directly (after the lender considers your finances).
Both types of loans have advantages and disadvantages. Before making a decision, you need to understand the terms.
A secured loan is a loan backed by collateral. The most common types of secured loans are home and auto loans. With these loans, the security is in your house or in your car. But in reality, the collateral can be any type of financial asset that you own. And if you don’t repay your loan, the bank can use your collateral as payment sixteen. A withdrawal will stay on your credit report for up to seven years.
When you obtain a secured loan, the lender puts a link to the asset that is offered as collateral. Once the loan is repaid, the lender removes the link and you own both assets for free and crystal clear.
According to Experian, you can use the following types of assets as collateral for a secured loan:
An unsecured loan does not require collateral, although you will be charged interest and sometimes fees. Student loans, personal loans, and credit cards are examples of unsecured loans.
Since there is no collateral, financial institutions make unsecured loans based largely on your creditworthiness and payment history. Because of this, unsecured loans can (but not always) have higher interest rates than secured loans.
Unsecured personal loans are becoming more and more popular. There are approximately 20.2 million personal borrowers in the United States, according to Lending Tree Online Loan Market. You can get a personal loan for almost any reason, whether you want to renovate your kitchen, pay for a wedding, go on a dream vacation, or pay off credit card debt.
Most people get personal debt consolidation loans, and since personal loans tend to have a lower annual interest rate than credit cards, borrowers can often save money on interest.
Before applying for a secured or unsecured personal loan, make sure you have a clear payment schedule.
As a general rule of thumb, only borrow what you know you need and can afford to collect. Make sure you are satisfied with the refund deadline. Just because you can get a loan doesn’t mean you have to. So take your time and do your research properly before signing on the dotted line.