Secured vs Unsecured Loans Understanding the Differences

Which is more appealing, secured or unsecured debt? The answer to that question depends on your perspective and your credit rating.

Let’s be honest, loans and mortgages are a way of life. If you want to own a house you have to take out a mortgage loan for payment of the house. Unless, of course, you just happen to have the thousands of dollars in cash in your pocket. I dare say that is not the case 99.9% of the time. Secured debt means you put up collateral, or some form of “security” the creditor can take back if you should stop paying (creditor’s refer to this as defaulting) on your loan. A mortgage loan on your house is secured by your home, and your automobile loan is secured by your car.

Unsecured debt means there is no collateral or property for the creditor to receive, or take back, if you don’t make your payments. Credit cards are an example of unsecured debt, and so are personal loans.

Do you see the major difference? It’s the “risk” the creditor assumes when deciding to lend you money. There are pluses and minuses to both forms of debt. A secured loan is of less risk to the creditor so they will usually offer you a much better rate of interest. If you don’t make your payments on your car loan they will take your car. The bank knows in this day and age a car is really a necessity, so they will give you a great rate for securing the debt providing your credit history and your employment record are good. Odds are you need your car and you will pay your payments in a timely fashion. With a clean credit record and a good credit score this will also make you a more appealing borrower to the bank and they will give you a lower interest rate. Make no mistake, whether or not you have collateral or not, your personal credit history will determine the overall “best deal” you get on an interest rate.

If you take out an auto loan; the bank or finance company will make you carry full coverage insurance on the secured property, in this case that would be the car. Full coverage insurance isn’t too bad if you’re over 25 and have a clean driving record. If your 20 and in college the chances are you are buying a used vehicle and you will probably pay more for your insurance every month then you do for your car payment. In this situation, it may make more sense to take out a personal loan to pay for the car so you can carry liability insurance only. Unfortunately, most 20 year old college students do not have enough credit history to sign for a loan on their own and need a co-signor.

With an unsecured loan you can sell your car even if you haven’t paid the loan off, but if you have a secured loan, such as an auto loan, you can not sell the car unless you can pay off the balance of the note with the proceeds of the loan.

With an unsecured loan you don’t have the attachments to property but you will most likely pay a higher interest rate because the creditor is taking more risk. If you have a secured loan you can obtain a better rate and better terms, but you can not dispose of any of the property until it is paid in full.

As I mentioned above, both methods have pluses and minuses and you have to sit down with your budget and your financial goals and decide what is right for you. There are no one-size-fits all answers. Whichever way you decide, make sure you can keep to your commitments,. Do not borrow more money then you can afford, no matter how much that car dealer or real estate agent tries to convince you that you can afford it. Only you know your financial limits and only you can discipline yourself to stay with in those limits.