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What Is The Difference Between a Secured and Unsecured Personal Loan?

Guy Handing Out Cash

If you are facing past-due bills or struggling to make ends meet between paydays, a secured or unsecured personal loan may be a viable option for you. Eligibility requirements vary from lender to lender, but oftentimes you can be approved within 24 hours. As with any contract, you must read the fine print and obtain written verification of the terms and conditions of the loan agreement. Failure to repay a personal loan could have lasting financial consequences, including higher interest charges, lower consumer credit scores, and less borrowing ability for years into the future.

What Is a Personal Loan?

Unlike auto loans and mortgage loans — which are approved for specific purchases — personal loans can be used to purchase anything. Generally, borrowers request personal loans to make ends meet between paydays, to pay off outstanding debt, or to finance a high-value purchase.

What Is a Secured Personal Loan?

To obtain a secured personal loan, you must provide some form of collateral, which is a high-value item. Common forms of collateral include real estate, heirlooms, furniture, artworks, stocks and bonds, dividends and other high-value property. When obtaining a secured personal loan, the borrower must sign over ownership of the collateral item to the creditor — however, the debtor maintains physical possession of the item. If the loan defaults, the creditor can legally take ownership of the item to offset the cost of the default debt.

What Is an Unsecured Personal Loan?

Unlike secured personal loans, unsecured personal loans do not require collateral. This means that you can request one of these loans, be approved, and not have to sign away ownership to any property. Not only that, but the approval process is also typically faster. Depending on the loan amount, you could receive your funds in minutes.

Generally, unsecured loans are reserved for borrowers with a strong borrowing history, meaning that they have high consumer credit scores and minimum debt. Borrowers with little to no credit history may also qualify for an unsecured personal loan, but one for a smaller amount.

Disadvantages of Both

The biggest disadvantage to a secured personal loan is the possible loss of property on your part. If you default on this type of loan, you risk losing complete legal ownership of your house or other high-value item. Your lender or lending partner can file a petition to have the item turned over to the court. If such petition is approved, you must comply with it, and in doing so you will lose all legal right of ownership to the item. This could prove particularly difficult if you initially believed you could repay your loan as agreed and are now forced to deal with the consequences.

The biggest disadvantage to an unsecured personal loan is that, with this type of loan, you are approved for a lower line of credit than you might otherwise be approved for if the loan were secured with a high-value item. However, if you have a high consumer credit score, you should be able to get approved for the highest amount available.