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Difference between Secured and Unsecured Loans


Loans have two distinct types and before a lender releases you the amount you are borrowing, you need to decide which one you are going to choose.

The amount of money that you can borrow and the interest that you’re going to pay will depend on what type of loan you’re going to pick from the two.

The two types of loan are:

  • Secured loan
  • Unsecured loan
What is a secured loan?

When you choose a secured loan, you are required to show a piece of collateral. A collateral is something valuable like a car or a home (an asset) that the lender can take if you don’t repay the amount that you borrowed from them.

A good example of a secured loan is a car loan and a mortgage loan.

Here are some advantages that you can get if you choose a secured loan:

  • You are entitled for lower interest rates compared to others (unsecured loan takers) and longer payment schedules to repay the loan.
  • When you’re able to pay within the time frame given, your credit score will improve and would get you easily qualified for the next secured loans you’re planning to get.

When there are advantages, there are also cons in choosing this type of loan.

  • Failure to make on time payments means you’ll lose the collateral which is your home or your car.
  • Instead of getting a good credit score, you would likely be a target for collection.

What is an unsecured loan?

This type of loan is the opposite with the secured loan. There will be no property attached to the loan that the licensed cash lender can take if you can’t pay the debt. The most common types of this loan are student loans, personal loans, payday loans, and even credit cards. Before getting approved with this type of loan, you need to have a good credit standing.

This is commonly used by many because with credit cards, you can buy anything today as long as you will be able to repay the card issuer when you receive the bill. If you won’t be able to pay the balance when the due date comes in, you’ll be entitled for high interest rates.

Like secured loans, unsecured loans has its own advantages:

  • It is easy to get qualified for an unsecured loan compared to the first one. You don’t need collateral to get approved, which is one of the major reasons why it is easier. Lenders can help you buy things and make payments even if you don’t have a single penny on hand.
  • Since you can only borrow a small amount of money compared to secured loans, you will be able to pay on time each month. That way, you can improve your credit standing which means you would be eligible for a lower-interest rate the next time you take a loan.

It also has its own disadvantages:

  • Since there is no collateral, there’s higher interest rates compared to secured loans. Which means you have to really budget your income if you don’t want to be put into collections?
  • Late payments or missing payments will surely affect your credit standing.
Which is better and why?

Even if a secured loan is required to have a collateral of the property or the vehicle that you are trying to get, since there will be a contract with a secured loan, it is more likely the choice everyone is going into.

With a secured loan, the time frame for you to pay the loan is a lot longer than an unsecured loan which means that the interest rates are lesser compared to the latter. This thing would be a benefit for you instead of a burden even if it’s borrowed money.


Secured and unsecured loans such as foreigner loans have their own advantages and disadvantages and it still depends on the borrower which type of loan he is going to get or qualified for.

Whichever you choose in the end, in order to not be buried in debts, make sure that you pay your loans on time and do not miss a single payment so it won’t affect your credit standing. A good credit standing means you will be able to get a lower interest rate the next time you apply for a loan if you still want to.

To know more about how you can apply for a secured or unsecured loan, click here.


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