How to Choose between a Secured and an Unsecured Loan

Use these guidelines to determine which will work for you

When you are looking to borrow money, you might be offered a choice between a secured loan and an unsecured loan. Which one should you choose? Is one better than the other? That depends.
Here’s a guide to the difference between the two types of loans as well as the benefits and drawbacks of each type of loan.

Secured loans

A secured loan is one that is backed by collateral, such as property. If you fail to pay your monthly interest on the loan, the bank that lends you the money can take possession of the property.
Usually, the interest rate on a secured loan is low as the lender is taking less of a risk in advancing you the money.
Here are some secured loans that you might obtain:
Property loans
Mortgages are secured by the real estate that you are buying.
Additional money that is lent to you on the value of the property, such as a line of credit or home equity loan, are also secured by the equity you have in the home.
Failure to pay back the loan can result in you losing the property.
Car loans
Loans on an automobiles operate in the same way as the mortgage on a house. If you fail to keep up the payments, the lender can repossess the car.
Personal secured loans
Here, the collateral for the loan is usually cash that you have in an interest-bearing savings account at the bank. Failure to pay the loan means you lose the cash.
Secured credit card loans
People who have a low credit score, or have not been able to build up a credit score, can obtain a credit card on the basis of a deposit of cash in the bank. You cannot spend the cash, but some banks will make the amount available to you later if you use the card responsibly or should you cancel the card.
Loans to help you build credit
These loans are designed specifically to help people with bad credit scores or to build up a credit rating. You might have the money—or a relative or friend might give you the money—to pay in full for, say, a car. The bank can set up a loan on the car and use your cash in the bank to pay off the loan. In that way, your credit score will improve over the time the loan is paid off.

Benefits and drawbacks

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