A personal loan can be either secured or unsecured. A secured personal loan is backed by collateral, such as a car or house. An unsecured personal loan is not backed by collateral.
Secured personal loans
Lenders are more likely to approve a secured personal loan than an unsecured personal loan because the collateral reduces the lender’s risk. If you default on the loan, the lender can seize and sell the collateral to recoup their losses.
Secured personal loans typically have lower interest rates than unsecured personal loans. This is because the lender is less likely to lose money if you default on the loan.
Unsecured personal loans
Unsecured personal loans are more difficult to qualify for than secured personal loans because the lender has no collateral to fall back on if you default on the loan. As a result, unsecured personal loans typically have higher interest rates than secured personal loans.
Which type of personal loan is right for me?
The best type of personal loan for you will depend on your individual circumstances. If you have good credit and a low debt-to-income ratio, you may be able to qualify for an unsecured personal loan with a competitive interest rate. However, if you have poor credit or a high debt-to-income ratio, you may be better off applying for a secured personal loan.
Here is a table that summarizes the key differences between secured and unsecured personal loans:
|Secured personal loan
|Unsecured personal loan
|Credit score requirement
|Debt-to-income ratio requirement
Examples of secured personal loans
Here are some examples of secured personal loans:
- Auto loan: An auto loan is a secured personal loan that is used to purchase a car. The car is used as collateral for the loan.
- Home equity loan: A home equity loan is a secured personal loan that is used to borrow against the equity in your home. The equity is the difference between the value of your home and the amount you owe on your mortgage.
- Secured credit card: A secured credit card is a type of credit card that is backed by a deposit. The deposit is used as collateral for the credit card.
Examples of unsecured personal loans
Here are some examples of unsecured personal loans:
- Signature loan: A signature loan is a type of unsecured personal loan that is not backed by collateral.
- Credit card cash advance: A credit card cash advance is a type of unsecured personal loan that allows you to borrow money against your credit card limit.
- Peer-to-peer loan: A peer-to-peer loan is a type of unsecured personal loan that is funded by individual investors.
Whether a personal loan is secured or unsecured depends on the lender’s requirements. Secured personal loans are backed by collateral, while unsecured personal loans are not. Secured personal loans typically have lower interest rates than unsecured personal loans, but they are also more difficult to qualify for. The best type of personal loan for you will depend on your individual circumstances.