Sometimes, disasters can hit you all at once. Your car breaks down, your dog is sick after devouring an entire chocolate bunny, and you drop your cell phone into the bathtub.
Suddenly you are on the hook for some sizeable expenses.
When faced with needing funds that exceed your current budget, you may think you are out of luck. But whether the cause is an unexpected expense or something you have long been planning for, help may be available in the form of a loan.
In situations such as these, you will likely need to decide between one of two options: secured vs. unsecured loans. Read on to learn about the differences.
Differences Between Secured vs. Unsecured Loans
A secured loan involves a lender issuing a loan that is backed up by some kind of collateral. This is something that carries a monetary worth equal to or greater than the amount of the loan. The most common types of secured loans include home equity and car loans.
Under a secured loan, the lender holds the collateral as a way to protect themselves in case you are unable to pay the loan back. So in the case of a car loan, if you fail to repay the loan, the lender can take possession of the car.
An unsecured loan involves a lender loaning money without any collateral. The lender will loan the money because they believe there is a high probability that the loan will be repaid. For this reason, many unsecured online installment loans are only available to those with a good credit history.
Advantages and Disadvantages of Secured Loans
The best advantage of a secured loan is they are usually offered with lower rates and attractive terms to the borrower. A secured loan is also about the only way to obtain a large amount of money. The risk becomes too high for the lender to loan large sums of money without collateral.
The biggest disadvantage of a secured loan is that you are putting something of value on the line to obtain the loan. If for some reason you are unable to make your loan payments, the lender has the right to take possession of your collateral. Under the worst scenarios, you could lose your home or your car.
Advantages and Disadvantages of Unsecured Loans
If you have a good credit record, you may be able to obtain a loan without having to put up anything of value in exchange. This is what makes unsecured loans attractive to borrowers. You are not risking the loss of an asset or other items of value.
Unsecured loans are often for modest amounts. Credit cards are an example of a very common type of unsecured loan.
Because of the higher risk to the lender, unsecured loans generally come with higher interest rates than secured loans. Another disadvantage of unsecured loans is that those without good credit are often unable to obtain one.
Which is the Right Loan for You?
If your credit history is not strong, a secured loan is usually the best option to take. You will get better interest rates and therefore financially they usually make the most sense. If you need a loan for a big ticket item, a secured loan may be your only option.
However, if you only need a modest-sized loan and would rather not put up any collateral, you could consider an unsecured loan. Situations such as those mentioned earlier could be helped by taking out a personal loan. Finding the best personal loan can be overwhelming, and a good comparison tool can help break down the decision-making process.
Need Help With Getting a Personal Loan?
Deciding on a loan might seem like a simple decision. It is not just a matter of finding the lowest interest rates. In addition to the choice between secured vs. unsecured loans, other factors such as your financial goals, current financial situation, and your need for the loan are also important.
Explore the many ways Bonsai Finance can help you. Our information is always free, objective, and easy to understand.