Whether you’re new to the world of financing or you’ve done this a number of times before there’s always more to know about your options and what is out there so you can decide what will work best for you and your circumstances. One of the first basic decisions you have to make is whether you want to apply for secured loans or unsecured loans, so, what’s the difference? This article goes over where these options differ so that you can decide what is important for you and your financial situation.
Unsecured loans are based on your financial background, focusing on your income, and your credit history. This is all they have to look at and base their decision to lend to you on. When a lender looks at your credit history they are trying to decide how much of a risk you represent—the risk being that you won’t make your monthly payments on time. When you have a lot of late and missed payments in your financial history this tells them that you are likely to not pay on time. When you are considered a high risk applicant they are less likely to approve your application at all, and when they do, the worse your credit is worse the higher the interest rate they offer you will be. Another key difference when compared to secured financing is that they are much faster to get approval for because there is no evaluation process. All they have to look at is your history and your income, which won’t take them long to judge.
Secured loans are also based on your financial background, like your income and your credit history, but use collateral in addition. The collateral takes the pressure off of your financial history, but that history does still matter. The collateral will be taken if you fail to make your payments. Because there is a way for the lender to recover their money they will be much more likely to approve your application with an iffy credit history, and are going to offer you a better interest rate than they would otherwise. It does take a bit more time however because whatever you are using for collateral has to be appraised to determine it’s worth.
So what option works best for you? This depends on what your needs are exactly. Everyone wants the best interest rate they can get! But is approval time important, and what is your financial history like? These are questions you should ask yourself before determining what is the right path for you when you’re looking at secured loans and unsecured loans.
