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Personal Loans
4 minute read

Considering applying for a personal loan, but not sure if a secured or unsecured personal loan is right for you? The choice depends on your financial situation, goals, and the level of risk you’re comfortable with. In this article, we’ll cover the differences between secured and unsecured personal loans so you can make your decision with confidence.

What’s a secured loan?

A secured loan is any loan that’s backed by collateral—a valuable asset, like a vehicle or home. They tend to come with lower rates and higher loan amounts than unsecured loans.

Lenders can offer better terms with secured loans because the collateral lowers their risk. In cases where a borrower defaults on a secured loan, the lender has the right to recoup their losses, which could include collecting and selling the collateral.

With that said, if you can commit to the repayment terms, taking advantage of the benefits secured loans provide could be a wise financial decision.

Types of Secured Loans:

Whether you want to purchase a home, a vehicle, or apply for a credit card, several secured loan options could be available to you. Here are a few common types:

  • Mortgage loans are secured loans used to finance a home purchase. With a mortgage, the collateral is the property itself.
  • Auto loans are secured loans that use the purchased vehicle as collateral. Generally, the lender pays the dealership the full amount, then the borrower repays the lender in fixed monthly installments.
  • Secured credit cards, unlike typical credit cards, are secured by a cash deposit. Since the lender gets money in hand up-front, they’re much easier to qualify for, making them ideal for borrowers establishing or rebuilding credit.
  • Title loans are short-term loans that use a borrower’s paid-off vehicle as collateral. While they don’t require credit checks, there’s a lot of risk. The average monthly finance fee of 25% (which translates to an APR of 300%) can get expensive, fast.

What Is an Unsecured Personal Loan?

Unlike secured loans, unsecured loans don’t require collateral. Instead, lenders consider a borrower’s creditworthiness, their ability to repay the loan, and information in their application to decide if they qualify for an offer.   

Unsecured loans are a good fit for people who don’t have collateral or are uncomfortable with the risk involved with secured loans. And while there’s no collateral to collect if a borrower defaults on an unsecured loan, they can still face consequences for not repaying their debt. In addition to negatively impacting their credit score, their chances of obtaining another unsecured loan in the future are much lower.  

Types of unsecured loans

For borrowers with a strong credit history and stable income, there are many types of unsecured loans available:

  • Credit cards are themost widely held form of unsecured loans, allowing users to borrow what they need up to a certain credit limit. A minimum monthly payment is required, and interest is applied on balances that remain after the due date. 
  • Personal lines of credit are similar to credit cards. While they both have a credit limit, interest is only applied to the amount borrowed, and there’s a limited “draw period” when the line of credit can be used. Once the draw period expires, the line must be paid back in full.
  • Personal loans are lump sum payments deposited directly into the borrower’s bank account. They’re repaid in fixed monthly installments over an agreed-upon period and are a great option for quick funds.

Unsecured personal loans, like the Best Egg Personal Loan, can also be used for a variety of purposes. From consolidating high-interest debt to paying for a wedding, the possibilities are endless:

Best of all, you can check your rate in minutes without impacting your credit score. There’s no harm in seeing what you qualify for.

Should I apply for a secured or unsecured personal loan?

The type of loan that will best meet your needs depends on many factors: the amount you want, the time you need to repay it, and whether you’re willing to take on risk for a better rate. Try shopping around to learn what terms appeal to you, then check your options to see what you’re approved for.

Once you’re equipped with that knowledge, you’ll be ready to make an informed financial decision.

This article is for educational purposes only and is not intended to provide financial, tax or legal advice. You should consult a professional for specific advice. Best Egg is not responsible for the information contained in third-party sites cited or hyperlinked in this article. Best Egg is not responsible for, and does not provide or endorse third party products, services or other third-party content.


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