The difference between a secured loan and an unsecured loan
Paper or plastic? Decaf or caffeinated? Secured or unsecured? If you’re looking for a loan, but don’t know whether you need a secured loan or an unsecured loan, this is your chance to figure it all out.
The primary difference between a secured and an unsecured loan is whether or not the borrower has to put up collateral to secure the loan. For a secured loan, a lender will insist on collateral to minimize their risk. An auto loan, for instance, is secured by the car itself; the lender simply repossesses the car if the borrower fails to make payments on the loan.
On the other hand, an unsecured loan is one without collateral. When obtaining an unsecured loan, the borrower doesn’t have to specify its intended use, and it can be used for just about anything. For instance, an unsecured loan can be used for something as prosaic as debt consolidation, as pleasant as a vacation, or as essential as an emergency medical procedure.
Accordingly, because the lender can’t repossess a week in Hawaii, a zero-balance credit card or the stitches in a toddler’s forehead, the interest rate on an unsecured loan is higher than on a secured loan, reflecting the lender’s greater risk exposure.
However, the interest on an unsecured loan is usually lower than on credit cards, and is certainly lower than the interest rate charged for credit card advances. As an added benefit, an unsecured loan almost always comes with a fixed interest rate and carries no annual fee.