If you’re wanting to take out a loan, it’s important to know your options. Your two loan options fall under secured or unsecured. So what’s the difference between the two? Below we will cover the differences and how you can determine which type of loan is best for you.

Secured Loan

In order to determine if a secured loan is right for you, it’s important to understand exactly what it is. A secured loan is backed by something of value. Typically, this will be a vehicle or house, which will be used as collateral. With a secured personal loan, the borrowing limit is usually higher, and the interest rate typically lower due to the loan being backed by collateral. The important factor here is to understand the lender can take possession of the item used as collateral if you do not pay back the loan. Therefore, you will want to verify you can indeed make the payments before you decide on taking out a secured loan. Examples of secured loans include but are not limited to Auto Loans, Mortgages, and HELOCS.

Unsecured Loan

An unsecured loan is much different. With an unsecured loan, the lender is typically at higher risk because there is not collateral tied to the loan. Therefore, the interest rate is typically higher and the total amount borrowed will usually be lower. Excellent examples of an unsecured loan include student loans, Credit Cards, and unsecured personal loans.

Which Loan Is Best For You

When determining which loan is best for you, you will want to consider if you can safely make your payments on time and pay back the loan without falling into financial stress. Typically, it’s easier to get a secured loan because the risk falls more on the borrower than the lender. Due to less of a risk to the financial institution, the interest rate will usually be lower. This means, if you can safely afford this option, a secured loan may make more financial sense long term. However, if you have bad credit, or are in the process of rebuilding your credit, you might not qualify for a secured loan. In this instance an unsecured loan becomes your best option. This isn’t necessarily a bad thing. As long as you can afford the agreement, an unsecured loan can offer you much needed assistance.