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Understanding the Differences Between Secured and Unsecured Loans

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18 JUNE 2019

Understanding the Differences Between Secured and Unsecured Loans

Thinking about a personal loan? If you are, you’ve likely been confronted with a choice: Should you take out a secured loan or an unsecured loan?

Choosing between secured and unsecured loans can be as simple as choosing between lower risk or higher rates, but the reality is that such a decision is not always easy to make. You need to fully understand your own circumstances, as well as the pros and cons of each type of loan.

Before you take out your next personal loan, take a peek at the differences between unsecured and secured loans.

What are secured loans?

Secured loans are loans borrowed against an item (called collateral) - like a laptop, mobile phone, gaming console, bike, tool or even a car. That item acts as something that can be sold on if the person borrowing doesn’t make their repayments (called defaulting).

For large loans, this could be a home or a car. But for most personal loans, collateral could be household valuables such as video game consoles, televisions, computers, sports equipment, power tools, or jewellery.

Benefits of Secured Loans

Because a form of collateral has been provided upfront, secured loans are considered safer for lenders, and so interest rates for these loans are often lower. With a responsible repayment plan in place, a borrower can get a secured loan at a lower rate and pay it off quickly without any effect on the item they put up.

If the risk is lower for the lender, however, it is higher for you. You risk losing the item you provided as collateral if you fail to pay your loan. Fortunately, lenders would prefer the win-win outcome of a completed loan payment. Many will work with you to extend your payment terms for an interest charge. In some cases, secured loans won’t have a negative impact on your credit score because your item acts as a form of up-front payment for the loan.

Speak to your lender about borrowing responsibly and be aware if your loan is worth more than your collateral, as you may still owe money if you default.

What are unsecured loans?

Unlike secured loans, unsecured loans are not borrowed against an item put up by the borrower. Because they are riskier than secured loans, lenders will often charge higher interest rates or loan smaller amounts.

An unsecured loan will vary depending on whether it is borrowed at a fixed-rate (interest rate never changes) or variable term (interest changes depending on the market). Either way, borrowers risk damage to their credit score and visits from collectors should they fail to make payments on their loan.

Benefits of unsecured loans

The interest rates of an unsecured loan will change depending on the quality of your credit score, making them a better option for people with excellent credit. You may also decide that a slightly higher interest rate is better than putting your property at risk. Your lender will look at your current financial circumstances, including your savings and income, and work with you to craft loan terms that will be best for you to manage.

The lower borrowing amounts of unsecured loans make them better-suited for smaller purchases. If defaulting on an unsecured loan risks damaging your credit score, it’s worth mentioning that successful repayment will reflect positively in your credit score.

Feel secure with a loan from Superloans

Whether you choose to go with a secured or unsecured loan, Superloans will offer the best rates with the most flexible plans. Our loan experts will work with you to develop the perfect loan for your situation. We’ll even help you determine if an unsecured or secured loan is the better choice for you! Don’t hesitate. Contact Superloans today!

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