Personal Loans Articles

Decisions-Decisions -- Unsecured or Secured Loans

Everybody needs some extra money every once in a while for a variety of reasons. From buying a new car to financing a wedding to purchasing new furniture to paying off debts or tuition bills, obtaining an additional source of funds becomes almost a rite of passage in the process of achieving the great American Dream. Decisions on top of decisions. How does one decide whether to take out secured loans or unsecured loans when the time arrives?

Got Collateral- Go Secured Loans

If you have collateral, then you can take advantage of the many benefits of secured loans. What can be used as collateral though? Property such as a home or car can be used to secure a loan. However, it is important to understand that offering collateral is not the same as simply proving that you have credit worthiness. Some risk does exist for the borrower to the extent that the home can actually be lost should the borrower need to default on the loan.

However, in exchange for this offering of collateral, the borrower can tap into some very lucrative benefits. In the first place, the provision of collateral generally speeds up the application process with an early approval. Secondly, the presence of collateral leads to more favorable interest rates on the loan, better terms, lower fees, and in general, a better APR or annual percentage rate.

No Collateral- Use Unsecured Loans

Obtaining a loan without collateral limits the borrower to unsecured loans. This type of loan is provided by numerous lenders, but it generally comes with a higher price. Not only will it take longer to receive approval for this type of loan, but also, the terms are somewhat less agreeable. Since no collateral is offered when obtaining unsecured loans, the interest rate is generally higher, the fees are more expensive, and the terms are less flexible.

Additionally, without the presence of collateral to guarantee the debt, the individual's credit history becomes the most important factor in determining several facets of unsecured loans. In the first place, the approval process takes slightly longer when the individual's credit background and current circumstances in life are the primary factors in determining his credit worthiness. Additionally, even though the borrower does not offer up any collateral, the lender can still go after it should the borrower default on the loan. It will simply take longer for the lender to take possession of any assets that the borrower has.

Decisions to Make When Choosing Unsecured or Secured Loans

The purpose of the loan should be the primary indicator as to whether or not the borrower should look at unsecured loans versus secured loans. If the loan is intended to pay for a large expense, then the borrower is going to want the longer term to pay back the debt that provided by a secured loan. If the money is needed to tide the borrower over during a rough financial patch, an unsecured loan is usually sufficient.