7 Differences Between Secured and Unsecured Loans You Need to Know
If you are looking for a loan, you may have come across the terms secured and unsecured loans. What are they and how do they differ? In this article, we will explain the main differences between these two types of loans and how they can affect your borrowing experience.
Secured loans are loans that require you to pledge an asset as collateral for the loan. This means that if you fail to repay the loan, the lender can take possession of the asset and sell it to recover their money. Examples of secured loans are mortgages, car loans, and home equity loans.
Unsecured loans are loans that do not require any collateral. This means that the lender relies on your creditworthiness and income to approve the loan. If you default on the loan, the lender can only sue you for the unpaid amount, but cannot seize any of your assets. Examples of unsecured loans are personal loans, credit cards, and student loans.
Here are seven key differences between secured and unsecured loans that you should know before applying for one:
1. Interest rate
Secured loans usually have lower interest rates than unsecured loans, because they pose less risk to the lender. The lender can charge a lower interest rate because they have the option of taking your collateral if you default on the loan. Unsecured loans have higher interest rates because they are more risky for the lender. The lender has no guarantee that you will repay the loan, so they charge a higher interest rate to compensate for the risk.
2. Loan amount
Secured loans usually allow you to borrow more money than unsecured loans, because they are backed by the value of your collateral. The more valuable your collateral is, the more money you can borrow. Unsecured loans have lower loan limits than secured loans, because they are based on your income and credit score. The higher your income and credit score are, the more money you can borrow.
3. Loan term
Secured loans usually have longer loan terms than unsecured loans, because they involve larger amounts of money and lower interest rates. The longer the loan term is, the lower your monthly payments will be. However, this also means that you will pay more interest over the life of the loan. Unsecured loans have shorter loan terms than secured loans, because they involve smaller amounts of money and higher interest rates. The shorter the loan term is, the higher your monthly payments will be. However, this also means that you will pay less interest over the life of the loan.
4. Credit score
Secured loans usually have less impact on your credit score than unsecured loans, because they are not reported to the credit bureaus as often. The lender only reports your payment history to the credit bureaus if you default on the loan or miss a payment. Unsecured loans have more impact on your credit score than secured loans, because they are reported to the credit bureaus every month. The lender reports your payment history, balance, and credit utilization to the credit bureaus every month.
5. Risk
Secured loans usually have more risk for you than unsecured loans, because you could lose your collateral if you default on the loan or face financial hardship. If you lose your home or car due to foreclosure or repossession, you could also damage your credit score and face legal consequences. Unsecured loans have less risk for you than secured loans, because you do not risk losing any of your assets if you default on the loan or face financial hardship. However, you could still damage your credit score and face legal consequences if you default on the loan or miss a payment.
6. Flexibility
Secured loans usually have less flexibility than unsecured loans, because they have fixed terms and conditions that you have to follow. You cannot change the interest rate, loan amount, or loan term without refinancing or paying a penalty fee. Unsecured loans have more flexibility than secured loans, because they have variable terms and conditions that you can negotiate with the lender. You may be able to change the interest rate, loan amount, or loan term without refinancing or paying a penalty fee.
7. Availability
Secured loans usually have more availability than unsecured loans, because they are easier to qualify for and obtain. You do not need a high credit score or income to get a secured loan, as long as you have enough collateral to secure it. Unsecured loans have less availability than secured loans, because they are harder to qualify for and obtain. You need a good credit score and income to get an unsecured loan, as well as a strong financial history and reputation.
These are some of the main differences between secured and unsecured loans that you should consider before applying for one. Depending on your financial situation and goals, one type of loan may be more suitable for you than another.
Secured and Unsecured Loans: Global Demand Trends
Secured loans are loans that require the borrower to provide some form of collateral, such as a car, a house, or a savings account, to secure the loan. Unsecured loans are loans that do not require any collateral, and are based on the borrower’s creditworthiness and ability to repay the loan.
Demand for Secured Loans
According to Investopedia, secured loans typically have lower interest rates than unsecured loans, since they are less risky for lenders. Secured loans also allow borrowers to access larger amounts of money and longer repayment periods than unsecured loans. However, secured loans also have some drawbacks, such as the risk of losing the collateral if the borrower defaults on the loan, and the need to maintain and insure the asset used as collateral.
The global demand for secured loans depends on various factors, such as the availability and affordability of credit, the economic conditions and outlook, the consumer preferences and confidence, and the regulatory environment. According to a report by Allied Market Research, the global secured personal loan market was valued at $19.25 billion in 2019, and is projected to reach $36.35 billion by 2027, registering a compound annual growth rate (CAGR) of 8.4% from 2020 to 2027.
The report attributes the growth of the market to the increasing adoption of online lending platforms, the rising demand for debt consolidation, and the growing awareness about the benefits of secured loans. The report also identifies some challenges and opportunities for the market, such as the impact of COVID-19 pandemic, the emergence of alternative lending models, and the stringent regulations and compliance requirements.
Demand for Unsecured Loans
According to Investopedia, unsecured loans have higher interest rates than secured loans, since they are more risky for lenders. Unsecured loans also have lower borrowing limits and shorter repayment periods than secured loans. However, unsecured loans also have some advantages, such as not requiring any collateral, and being easier and faster to obtain than secured loans.
The global demand for unsecured loans also depends on various factors, such as the creditworthiness and income of borrowers, the competition and innovation among lenders, the consumer behavior and expectations, and the legal and ethical issues. According to a report by Transparency Market Research, the global unsecured personal loan market was valued at $11.21 billion in 2018, and is expected to reach $26.68 billion by 2027, expanding at a CAGR of 10.2% from 2019 to 2027.
The report attributes the growth of the market to the rising penetration of internet and mobile devices, the increasing demand for instant and hassle-free loans, and the growing popularity of peer-to-peer lending platforms. The report also identifies some challenges and opportunities for the market, such as the high default rates and fraud risks, the adoption of artificial intelligence and blockchain technologies, and the changing consumer preferences and needs.
References:
http://www.imf.org/external/pubs/ft/fandd/1996/06/pdf/fleisig.pdf
https://books.google.com/books?id=csTgg-F1EpsC&pg=PA16
https://www.fla.org.uk/research/consumer-finance/
https://en.wikipedia.org/wiki/Special:BookSources/978-0-521-82670-9
https://www.investopedia.com/ask/answers/110614/what-difference-between-secured-and-unsecured-debts.asp
https://www.investopedia.com/terms/s/securedloan.asp
https://www.investopedia.com/terms/u/unsecuredloan.asp
https://www.nerdwallet.com/article/loans/personal-loans/secured-vs-unsecured-personal-loans
https://www.creditkarma.com/personal-loans/i/secured-vs-unsecured-loans
