When looking for funds, you may encounter two common choices: secured and unsecured loans. Understanding the difference can help you choose a suitable option and avoid risking valuable property unnecessarily.
A secured loan requires collateral. Collateral is something valuable—such as a vehicle, home or savings account—that the lender may take if you fail to repay the loan. Auto loans and mortgages are common examples. Because collateral reduces the lender’s risk, secured loans may provide lower interest rates, higher borrowing limits or longer repayment periods.
An unsecured loan does not require property as security. Many personal loans, credit cards and student loans fall into this category. Approval may depend more heavily on your income, credit history and existing debts. Because the lender accepts more risk, the interest rate may be higher.
Collateral does not make a loan automatically affordable. Missing payments on either type can damage your credit, lead to collection activity and possibly result in legal action. With a secured loan, you could also lose the property supporting the debt.
