Squirrelers

At some point in your life, borrowing money has probably crossed your mind at least once. Whether it’s from the bank, family, friends, or third-party lenders, having money leant to you is still called a loan. These loans can fall under two categories, namely: secured and unsecured. The primary difference worth noting between the two is the absence or presence of collateral, which is essentially something taken as security against the money you borrowed. So let’s deep dive into what secured and unsecured loans are below, along with detailing a few key examples worth noting.

Secured Loans

From the name itself, you can gather that secured loans are loans that have collaterals backed against them. Collaterals are assets, which can come in the form of a house, a car, or other highly valued items. If you agree to a form of a secured loan, the Balance notes that the lender can repossess the collateral if you fail to repay the loan according to the agreed terms. This reduces risk for the lender, as the borrower has a lot more to lose if they don’t take financial responsibility for the money they borrowed. Because of this, secured loans are typically easier to attain compared to unsecured loans, having less interest rates and a higher borrowing capacity.

Some examples of secured loans are: title loans and mortgages. For title loans, the equity of a car is used as collateral, while mortgages, on the other hand, uses the house being bought. Both loans can be easily attained, as title loans are available in big cities like Columbus, Ohio, and even here in Chicago, while mortgages can be taken out from banks and third party lenders across the country. Interest rates, however, can vary based on the loan, along with other factors such as state, equity of collateral, and more.

Unsecured Loans

Whereas secured loans use collateral, unsecured loans don’t — instead they make use of your credit rating, otherwise known as creditworthiness. Our article on ‘Shrewd Ways to Maintain Good Credit’ notes that your credit rating has a huge impact on your ability to borrow, as it is what determines whether or not you can borrow along with your interest rate. Regardless of whether or not your credit rating is good, Christina Majaski claims that interest rates are typically higher for unsecured debt instruments.

Some well-known forms of unsecured loans are student loans and credit cards. While student loans are typically done with a co-signer, who takes on the risk of the loan, credit cards are a line of credit that charges hefty interest rates. Student loans are available in every state — this is evident by both Connecticut and Pennsylvania’s high average student debt of up to $38,000 per student. Credit cards too, are easily obtained anywhere, and the US’ $1.04 trillion credit card debt can attest to that.

In a nutshell

To put it simply, unsecured debt has no collateral backing and thus, relies on your creditworthiness, while secured debt uses an asset for security and is easier to obtain. At the end of the day, understanding the difference between the two different kinds of loans can help you determine which loan is right for you.