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So, What’s the Difference Between Secured Loans & Unsecured Loans? There are two types of loans that you can take out unsecured and secured. Unsecured loans require a credit check and information that you supply such as income, employment, housing, and current debt levels. Unsecured loans don’t require a credit check. To receive an unsecured loan you put up collateral which is an asset that you own outright. This asset must have enough value to satisfy the lender that you are a good loan risk.

Key Factors:

  • For a secured loan, you put up something of value to ‘secure’ the loan, called collateral
  • Lenders give unsecured loans outright (without collateral) when you qualify
  • You can take out up to 3 personal loans at one time
  • People who are not approved for unsecured loans often go for a secured loan where there is no credit check
  • Over 51% of Americans, approximately 131 million said they’ve taken out a personal loan
  • 80% of Americans have some consumer debt i.e. credit card, personal loan, etc.
  • Not including debt from mortgages, the average American has about $38,000 in debt

Before you begin to look at loans there are lots of things to think about. First of all, what type of loan suits your situation? Will it be a secured loan or an unsecured loan? Learn what you need to know and what information you’ll want available as you begin the application process.

Unsecured versus Secured Loans

Unsecured Loans: An unsecured, personal or payday loan comes from a lender who considers your financial and personal information before extending the loan. Lenders do a credit check and look at income, employment, housing, and additional debt you may have before approving your loan.

Secured Loans: There is no credit check so if you have a bad credit history a secured loan may be your only option. You will be required to put up collateral. Collateral can be any asset that you own outright and that is of enough value to ‘secure’ the loan. Lenders will need proof of ownership and some proof of assurance of the collateral item’s value.   


Questions to Ask Yourself Before You Take Out a Secured or Secured Loan

What Should I Consider Before Taking Out a Loan?

Before considering any type of loan look at and consider all options. Could you borrow from family and friends instead? Could a local credit union give you better terms than other lenders? Do you have a good credit history and a longstanding relationship with your bank that could help you?

Why Do I Want to Take Out a Secured or Unsecured Loan?

Getting cash by taking out a loan can be a lifesaver, especially for one-off emergency expenses like hospital bills, home repairs, or car emergencies. Having said that, are you considering a personal or payday loan just for a fun event like going on vacation or a shopping spree? Then, you may want to stop and carefully consider how this can affect your debt and credit score before taking out a loan.

How Can Defaulting on a Loan Hurt My Credit History?

You may be tempted to think not paying back a little loan won’t hurt. You may say to yourself “It’s just a little $300 loan so if I don’t pay it back it won’t be a big deal.” I’m here to tell that it can be a very big deal.

If you don’t pay your loan back, any loan, your credit history will be affected and will in turn hurt your chances of getting other loans in the future. Even for a more significant loan like a home loan, car loan or college loan. You may be turned down due to the non-repayment that hurt your credit history.

Can a Bad Credit History Limit My Loan Options – Secured vs Unsecured Loans?

Yes. A bad credit history definitely limits the types of loans you can get. Not only that, bad credit affects the interest rate and size of the loan a lender would offer you. Over the life of your loan, you could spend hundreds maybe even thousands more depending on the rates and terms lenders give you.

In fact, if your credit history and credit score are bad enough, your only loan option could be a secured loan. When you take out a secured loan, you have to put up collateral against that loan. This ensures the lender that they can recoup their costs if you default on your loan. The lender then puts a lien on that asset you’ve put up. Once you pay off the loan then the lender removes the lien.

For instance, say you put up your ’65 Mustang worth $30,000 to take out a $7,000 loan (generally lenders will let you borrow up to 25% of your car’s value). Then if you find that you can’t make your payments, the lender can seize your car.

What Types of Assets Can I Put Up as Collateral for My Secured Loan?

  • Your home or another type of real estate
  • You can use your checking, savings or money market accounts even CDs
  • Trucks, cars, trucks, SUVs, motorcycles, yachts!
  • Investments such as stocks, mutual funds or bonds
  • Policies with enough value including life insurance
  • Valuables like jewelry and collectibles such as art, antiques, etc.

How Many Secured Loans Can I Have?

It depends on the lender/s. It’s possible to have up to 3 personal loans simultaneously from one lender. If you use several lenders then there isn’t a limit as long as you have enough valuable assets to offer up as collateral.

How Many Unsecured Loans Can I Have?

For unsecured loans, the limiting factor would be your debt-to-income ratio. If you have too much debt accrued and not enough income to make you a good loan risk, you’ll have problems being approved for additional loans.

Can I Take Out a Secured or Unsecured Loan to Pay off Another Loan?

Yes, you can. This is usually called a debt consolidation loan. When you take out this type of loan sometimes the stipulation is that the new lender pays off the other debt directly and then you make any payments to your new lender at a new interest rate to pay off your consolidation loan.

If I Default on an Unsecured Loan Does It Go On My Credit History?

Yes and if it involved your lender repossessing an item than that information can stay in your credit history report for as much as 7 year. It’s important to check your credit score and credit history each year to make sure it’s accurate. Errors can happen so you want to bring them to the attention of the credit report company.

What Can I Do to Improve My Credit History to Get an Unsecured Loan?

  • Register to vote – lenders use this as a form of i.d.
  • Pay off any credit card balances right away
  • Get rid of extra credit cards that you don’t use – too many on your record (whether you use them or not) has the appearance that you could use too much credit

Read: How Can I Improve My Credit Score?

Bottom Line:

Look at all your options before going for a loan – secured or unsecured. Make sure you have a plan to repay your loan because if you default it affects your credit score and the possibility of taking out future loans.

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