Secured loans compared to unsecured loans

When you are desperate for a loan you are prone to making rash decisions. Even though you may need money urgently, be it for a sudden emergency medical procedure, unexpected education fees for your children, car repairs or even home repairs, it pays to take some time and work your way through all the loan options available to you. And believe me, there are many!


Perhaps the biggest decision you will need to make is whether you want to take a secured loan or an unsecured loan option. These two loan options are the broadest way that loans are generally categorized by. They differ in a number of ways but perhaps the two main differences are the need for collateral and the interest rates you will be charged on each loan type. Let’s take a closer look at the two different types.

Unsecured loans

You can tell a lot about this loan from its name. With an unsecured loan, the applicant is not required to put up any form of security to secure the loan. Generally, these loans are for short-term only and for this reason, along with no collateral, their interest rate is far higher than a secured loan option. That said, they are quick and easy to take out and in some cases do not even require credit checks by the loan company.

But why are the interest rates so high on these loans? Well, without collateral, a loan provider has very little to fall back on should someone forfeit on their monthly instalments. These loans have become very popular as a way for people to secure money in a hurry. A payday loan is a perfect example of an unsecured loan. Here, the applicant loans a small amount of money and has to pay it back when they receive their next paycheck.


Secured loans

With secured loans, the application will take far more time than with unsecured loans. This is because generally, a far larger amount of money is loaned out and that needs some form of collateral put up by the applicant to stand as security for the loan. It also ensures that if the applicant should not pay back their instalments, the credit provider has a legal right to claim whatever asset was put up as security and to sell it to recoup costs.

Interest rates for these types of loans are generally lower than with unsecured loans. Obviously, if you think you are going to struggle to make the repayments, rather opt for a smaller loan as you do not want to lose whichever asset you choose as collateral.

Which loan should you pick?

Ultimately, the loan option you should go with is determined by your exact needs in terms of how much money you actually need. For smaller amounts of money that you intend to pay back quickly, an unsecured loan is your best option.

If you need a large amount of money and only intend to pay it back over the course of a number of years, then a secured loan is certainly your best option. Bear in mind, as we have already discussed, you will need to offer up some form of collateral to cover the loan amount.

No matter what loan you end up taking, ensure that you do your homework and find a loan provider that is ethical and not trying to make a quick but off people desperate for credit in a hurry.