Debt

Unsecured vs. Secured Debt

Choosing the perfect loan for your financial situation can be difficult. There are a plethora of debt options out there, each with different terms, conditions, and costs. And knowing the differences between them could help you save money in the long run. Learn more about unsecured vs. secured debt right here!

No matter what kind of financial product you choose, it will fall into one of two categories. It will either be secured debt or unsecured debt. Each of these forms of debt has its pros and cons. But it’s important to recognize the differences between secured debts and unsecured debts, so you know what to expect when shopping for your loan.

There’s nothing more frustrating than signing a contract and then discovering that it’s not the right product for you. And unfortunately, there are many lenders that hope to take advantage of borrowers by trapping them in a debt cycle. Educating yourself on different loans, lenders, and interest rates is the best way to protect yourself from a situation like this.

If you’re hoping to learn more about unsecured vs. secured debt, you’re in the right place!

The Difference Between Secured and Unsecured Debts

The main difference between secured and unsecured debt is that a secured loan requires collateral, and an unsecured loan doesn’t. Having a debt secured by collateral means offering up a valuable asset to the lender. A debt unsecured simply means that you can get a loan without collateral. Either of these can be a big risk depending on the lender and the conditions.

When debt is secured it’s a way for the lender to ensure that they will be repaid. If a borrower offers up a valuable item then they’re more likely to repay, so they can get it back. Secured debts carry collateral because it acts as “security” for the lender.

On the other hand, unsecured loans are based almost entirely on the borrower’s promise to repay. These are often reserved for borrowers with decent credit scores and less debt since they’re more likely to be financially trustworthy.

Collateral can come in many forms. The type of collateral you need to offer will largely depend on the type of loan, the specific lender, and their terms. If you’re able to get a loan without providing collateral, that is usually preferred. This way, you won’t be risking the loss of a valuable item.

While you might not be super familiar with the terms “secured” and “unsecured,” you’re most likely quite familiar with some of the financial products that fall into these two categories of debt. But no matter what kind of debt it is, it will either require collateral from the borrower or it will not.

Common Types of Secured Debt

Many secured loans are designed for borrowers with less-than-perfect borrowing histories who need financial help. However, there are several that still require good scores to be considered. Secured debts are a regular part of everyday life for many. The main thing to remember is that if you can’t make your payments the lender can seize the asset you offered up as collateral. So it can be a large risk. Here’s a list of some of the most common examples of secured debt:

Auto Loan

Auto loans, or car loans, are ones that a borrower gets to purchase a vehicle. You can find these at the dealership, banks, or other financial institutions. These are secured debt because the vehicle acts as the collateral asset. This means that if you default on the payment, the lender can take the vehicle back since it’s technically still their property.

Mortgage

A mortgage is a debt for buying a home or property. Because homes are some of the largest purchases borrowers will make, most people can’t buy one outright. And oftentimes you’ll need good credit to get a good mortgage. This is another good example of a secured loan. Just like with an auto loan, the house or property will act as collateral. If you make your monthly payments, you keep the home. But if you default, over time you could lose your home.

Title Loan

This is a product where the borrower uses their car as collateral to get quick cash. This is a common example of secured debt. Typically these borrowers are struggling financially which means they may have to pay higher interest rates. To get one, you offer your car title to the lender as collateral. They then give you money based on a fraction of the vehicle’s value, and you pay it off over time. If you pay it back in full, you get your title back. But if you can’t, the vehicle becomes the lender’s property through a process called “repossession.” And no one wants to risk losing their car.

Secured Credit Cards

A secured card is similar to a regular one, with one main difference. Instead of having a certain amount of available credit from the creditor, you provide money upfront as a deposit. You then use the card and spend up to the amount that you gave them. If you default on your payments, the creditor can just take your deposit to cover the charges.

A secured credit card might not provide you with quick cash in an emergency, but it can help you build your credit score. If you’re consistently using and paying off your secured credit card, your credit score may improve. This can lead to more borrowing options like other credit cards or personal loans. If you’re denied a credit card, a secured card may be the answer.1

Common Types of Unsecured Debt

If you’ve ever shopped for a loan, then you’ve definitely come across a lot of information on unsecured debts. This type of debt, just like secured debt, comes in many forms. It’s important to be familiar with secured and unsecured products before deciding which one is right for you.

If your borrowing history is good, the lender or creditor may not require the extra security of collateral. While this sometimes requires less risk, there is still a lot to consider. Below are some common examples of unsecured debt, and these debts include:

Credit Card

This is one of the most common financial tools out there. A credit card is essentially just a card that allows you to spend up to a certain limit, and then repay it later. The amount you can get will depend on your credit score, current credit card debt, and the creditor.

Most credit cards are unsecured, so you won’t have to worry about providing an asset to the creditor. That being said, you can usually only get approved for most credit cards if you have a decent credit score.

Student Loans

A student loan is an example of an unsecured loan. You can get one through the government, or from a private lender like a bank. These typically have low interest rates, and they’re a form of unsecured debt.

Borrowers use these to pay for higher education, and it can take many years to pay back this debt. The requirements for getting one will depend on the lender. If you fail to make payments they may be able to garnish your wages. Which means they’ll take a portion of your money directly from your paycheck to satisfy the debt.

Personal Loan

A personal loan is a type of debt people use to pay for personal expenses, as opposed to business expenses. These come in many different forms, they vary in their terms and interest rates, and many of them don’t require you to give an asset to the lender.

There are so many different kinds of personal loans out there. Some of these debts are good for borrowers with poor credit, some for borrowers with excellent credit. Common examples of these would be personal installment loans, bad credit loans, and bank loans. All of these can be unsecured debt.2

Which Type of Loan Is Right for You?

When deciding between unsecured vs. secured debt, there is a lot of information to consider. Do you have a good enough credit history for a low-interest unsecured loan? Do you have a low credit score and need a safe form of secured debt? What kind of asset should you offer? Can you afford the interest and payments? The type of debt you choose will largely depend on your specific financial situation.

That being said, the question of secured vs unsecured debts is a tough one. Make sure you weigh your options and do plenty of research on these two types of loans and the lenders that offer them. Remember that collateral is a form of security for the lender, and in some cases, it’s necessary to offer up an asset.

Having a debt secured by collateral may be a good choice if you need quick cash, need to build your credit, or if you’re purchasing a large asset like a house or car. Just make sure that if you’re considering secured debts, you’re fully aware of the terms and conditions. Losing a valuable asset could make life more difficult. So make sure you can pay it off.

Unsecured debts on the other hand are great for higher education, quick money for emergencies, and getting a credit card or line of credit. Just be aware of the interest rates, and make sure you’re getting a good deal based on your credit score.

If you’re debating between unsecured vs. secured debt, make sure to consider a few things: your credit score, the reason for the debt, and whether you can afford the payments the lender will require.

How Can We Help?

CreditNinja offers loans for borrowers in need, with less-than-perfect credit histories. We allow you to get the money you need, with a lower interest rate than many other bad credit lenders out there. CreditNinja is here to help. Apply today, and get the money you need to take your financial life to the next level.

And check out our related articles in the CreditNinja Dojo to learn more about unsecured vs. secured debt, and the risk and reward of each.

References:

  1. https://www.nerdwallet.com/article/credit-cards/secured-credit-cards-vs-unsecured-difference
  2. https://www.investopedia.com/terms/u/unsecuredloan.asp