Unsecured Loans & Secured Loans – The Fight of the Decade

That’s all she wrote folks!
When applying for a loan, you will be presented with the option of whether you want to have a secured loan or an unsecured loan. Both secured and unsecured loans have their benefits and their drawbacks, and it pays to know what these are before you decide. Today we are going to put the two options up against each other to determine which loan is better. We have unsecured loans in the red corner and secured loans in the blue. It’s a five round match for the title of “best loan option for you”. Let round one begin!

Round One: Interest Rate

Round One goes to secured loans as with their level of risk being considered lower causes lenders to offer lower interest rates. Interest rates are determined based on a few factors:
  • Credit Score
  • Borrowers Financial Situation
  • Borrowers Personal Situation
These factors help give lenders an idea of the risk of the borrower defaulting on their loan repayments and being unable to repay the loan. The higher the risk, the higher the interest rate. Having a secured loan, by offering up an asset as security means there is less risk involved since the lender may repossess the asset in order to pay off the loan. An Unsecured loan doesn’t offer this security. Instead, if the borrower is unable to make loan repayments, they will have it marked on their credit report and eventually will be contacted by a debt collection agency on the lender’s behalf. Unsecured loans, therefore, have higher interest rates due to the increased level of risk involved for the lender, not receiving the agreed repayments.

With round one in the books, secured loans come out with a narrow lead by playing a safer game and less risky shots.

Round Two: Speed of Application

Round two goes to unsecured loans with the process of acceptance being quicker than secured loans. Unsecured loans can come in many forms; personal loans, credit cards, student loans and payday loans. Not having to do the admin of registering an asset as security, means you may expect the process of receiving your unsecured loan to be faster. This is the same with credit cards and payday loans, you are not required to provide as much information, but this comes at the expense of a higher interest rate. Secured loans may take a little longer, but this is to ensure all the details involved in the loan is correct and that both parties are protected in the agreement.

Unsecured loans bring it back in the second round with pure speed. Although secured loans got a couple in at the end, it was still unsecured loans rounds.

Round Three: Borrowing Amount

Round three was close, but in the end, secured loans edged out and took the round. Lenders are more willing to allow more substantial borrowing amounts if the loan is secured, due to the perceived risk level. Offering an asset as security will mean that lenders are more willing to allow for larger borrowing amounts since they are more likely to get their money back.

Unsecured loans couldn’t go the distance in the third and secured loans came out at the end of the round to take it to 2-1.

Round Four: Default Penalties

No matter what, when it comes to borrowing money, a risk is involved. Both secured and unsecured loans present a risk to lenders as there is always a chance that issues arise, preventing repayments from happening. Failing to repay an unsecured loan can affect your credit score which then affects all future instances that involve borrowing (i.e. mortgages, credit cards). Failing to repay a secured loan can cause a vehicle or an asset to be repossessed and sold on your behalf in order to come up with the owed amount.

Halfway through the round, it appears that secured loans are coming worse off through the trades. Could this be unsecured loans comeback?

Losing your car sounds terrible, but believe it or not, having your credit score affected may be worse. Defaulting on an unsecured loan can mark your credit score, making it hard to get accepted for loans in the future due to having bad credit. It can take months or even years to build your credit score back up. You can read one of our previous blogs here if you want to find out how. Then along with having a mark on your credit score, you still have to deal with a debt collection agency coming to your door and repossessing your assets. A debt collection agency puts their fees on top of the already owed debt, so in the end, you may be facing the same penalties of a secured loan default but twice as bad.

That’s all she wrote folks! Unsecured loans played some risky shots in the 4th that came back to bite them in the end. Secured loans took the match three rounds to one.

Ultimately secured loans are the safer and better option for both lenders and borrowers. Applying for an unsecured loan, especially if you believe you have bad credit, increases your chance of being decline which further affects your credit score. Your best bet is to do your research first and make sure you are borrowing within your means. Doing this will mean that you shouldn’t be worried about missing payments, so offering an asset up as security can improve the interest rate you get. If you are concerned that you may default on a loan, you can always look into loan protection insurance to keep you safe.

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