October 2, 2024
When a person borrows money in the form of a loan, the lender is taking a risk by offering funds that may or may not be repaid in full. In order to lessen that risk, lenders add conditions that encourage borrowers to repay their debt on time. This can include increasing interest rates for borrowers who have bad credit or a history of missing loan payments. Another option is offering a secured loan, which ties the debt to an asset that can be seized if the borrower fails to pay, offering an extra layer of security for the lender. In fact, all loans fall into one of two categories: secured or unsecured. Read on to learn what this means and how to choose the right loan type for your needs.
There is one factor that differentiates secured and unsecured loans: collateral. Collateral is an asset that the lender can seize if you fail to make payments on your loan. Secured loans require collateral, effectively “securing” the debt, while unsecured loans do not. Because unsecured loans do not have a guarantee of collateral, interest rates tend to be relatively higher than unsecured loans.
A secured loan is any loan that requires collateral to ensure that the borrower repays the debt. If a borrower defaults on the loan by missing several payments, the lender may take possession of the asset to recover their money. A secured loan can be a good option for borrowers with poor credit or no credit history, because collateral offers the lender more confidence that the borrower will repay the loan. In exchange, the borrower may be able to get a higher loan amount or a lower rate than they might be approved for with an unsecured loan. However, a secured loan comes with some risk to the borrower — after all, if you fail to make several payments on a secured loan, you not only harm your credit score, but you could also lose the asset.
Depending on your lender’s requirements and your loan type, there are several ways you can secure a loan with collateral. Collateral can include any of the following:
When you apply for credit, the lender will request personal and financial information to determine several factors related to your loan. Most lenders review your credit report, income information, and expenses to decide how much money you can borrow, how long you have to repay it, how much interest you will pay, and more. For a secure loan, the lender will request additional information depending on the collateral type. This can include the year, make, and model of your vehicle for an auto loan and account information for an investment-secured loan. For a home equity loan, lenders often require a home appraisal to determine the value of your home.
An unsecured loan is any loan that does not require collateral. Lenders take on more risk with unsecured loans, which means interest rates can be higher than secured loans. In return, you do not run the risk of losing an asset like your vehicle or a savings account when you opt for an unsecured loan. However, unsecured loans are still reported to the credit bureaus, so be sure to avoid missing payments, which stay on your credit report for seven years. Like secured loans, most unsecured loans are installment loans, meaning you repay the loan and any interest it accrues in monthly payments over the course of several months or years.
Most unsecured loans, such as personal loans, can be used for nearly any purpose. These loans are paid to the borrower as a lump sum and can be spent just like cash. Unsecured loans are an ideal option for borrowers looking to make a big purchase, pay medical debt, or do home or vehicle repairs. Borrowers may also opt for an unsecured loan to consolidate debt or pay off a secured loan. Because they do not require often-lengthy home or vehicle appraisals, unsecured personal loans can fund relatively quickly. For example, with a Lendly loan, borrowers can receive funds from CC Connect in as soon as 24 hours after approval.
When you apply for an unsecured loan, the lender will require personal and financial information, such as your Social Security number and proof of income, to determine your creditworthiness. Lenders review your payment history, current debt, income, and more to ensure that you can comfortably repay your loan while also covering other debts and expenses. Lenders also use this information to decide your loan amount, interest rate, and repayment term. Though your credit score is an important factor in qualifying for an unsecured loan, having a bad credit score does not necessarily mean your loan application will be denied. Lenders may increase interest rates to offset the risk of borrowers with poor credit or no credit history for unsecured loans. A Lendly loan strives to provide affordable, unsecured installment loans accessible to anyone, even those with bad credit, by setting up payments directly from your paycheck.
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