Knowing the difference between secured and unsecured loans is necessary to understand how to manage your debt and prioritize your investments. No one likes the idea of dipping into their savings account, and quite frankly, sometimes the money just isn’t there for things like a new car, mortgage, furthering your education, or paying off credit card debt. In this case, taking out a personal loan might be your best option. Emergencies happen, and the additional cash from a personal loan can make the difference; providing you with the tools to accomplish financial goals or overcome economic struggles. There are two primary types of loans; secured and unsecured. When deciding between the two, it is essential to know their differences before committing to borrowing terms.
Buying a new car, or finally purchasing that dream home are two examples of when a secured loan may be necessary. A secured loan is typically easier to qualify for, and offers less of a risk to the lender, usually meaning the lender will provide more substantial loan amounts at a lower interest rate. However, a secured loan is connected to an asset as collateral, like a house or a car, or your education (student loans). The lender will hold on to the deed or title, and if a borrower is unable to continue paying off the loan, the lender has the right to take possession of the stated collateral.
The U.S. Federal Government administers student loans, such as Stafford loans or Parent PLUS loans, depending on the recipient. Stafford Loans are federal student loans that must be repaid and are available to both undergraduate and graduate students. The Parent PLUS Loan is a Federal student loan available to the parents of dependent undergraduate students. These Federal loans are secured loans because they are government-issued with borrower payback guaranteed by the government. A benefit of these U.S. government loans is that they typically have a lower interest rate.
For unsecured personal loans, there is no collateral required, i.e., the borrower has no material possessions attached to the loan. This also allows for less paperwork and a faster approval process. An unsecured loan is riskier for a lender, so loan limits tend to be lower and interest rates higher, depending on a borrower’s credit score. With the lender facing high non-payment risks, a borrower needs to have substantial credibility. A healthy credit score is essential to obtaining approval for an unsecured loan.
Private student loans are done through any bank or credit union. Typically private loans supplement Federal loans or are used when the borrower is unable to get a Federal loan. The benefit of private loans is that they can be for any amount and can help pay for books, tuition, housing, food and other things students may need for college. However, with private student loans, the interest rates tend to be higher than Federal and varies from bank to bank.
Unlike credit card debt and mortgages, which can be canceled if you file for bankruptcy, education loans of all types must be repaid. Most bankruptcy courts will not cancel them unless your situation is extremely dire.
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