If you have been looking into consolidating your debts, or freeing up cash for an essential purchase, then you will have come across secured and unsecured loans. But which one is best for your situation? Find out right here.
Secured & Unsecured Loans
There is a simple difference between secured and unsecured loans. Secured loans are seen by lenders as lower risk because they are taken out against your assets – usually your home. If you don’t pay, the lender can foreclose your home and sell it. Unsecured loans usually have higher interest because they are far riskier for the lender to make; you are just promising to pay them back. So which one is better for your situation?
If You Are Unsure About Your Credit Score
It can be difficult to guess whether a lender will reject your loan application, but you can give yourself a better idea by checking your own credit report. Try Experian, Equifax, and Transunion to get started. If your credit score is hovering around the mid-range, it might be worth attempting to bump it up a little before applying for the loan. You can find out how to improve your credit score here. It’s worth going for the safer, unsecured loan first, although you may be rejected. Consider a secured loan only if you can guarantee to yourself that you will be able to pay it off over the whole term.
If You Have A Poor Credit Rating
When you have a poor credit rating, your rate of interest on unsecured loans will skyrocket, and you could end up with a worse interest rate than you are currently paying. It might be that your only option is going for a secured loan: these usually have far lower rates of interest, but will be secured against an asset – which will often be your home. However, it’s important to realize that you can still get loans with bad credit. For example, certain auto financing firms will offer online car loans or lending options to those that may not get it elsewhere. So, if you are struggling with debt and need a car to earn money, it’s a route that you may have to take. Bear in mind that it is vital that you can commit to paying off a secured loan over the entire period. If you don’t think you will be able to, then just walk away and think about other avenues. Your home could be at risk.
If You Have Good Credit
If you have good credit and are just starting to get into debt problems, then look for unsecured loans only. Unsecured loans are a far safer option, as you won’t be risking them against your assets, such as your home or car. They are also available at reasonable interest rates, so you should be able to save money – in comparison to your credit card debts, at least. If you can find a loan that offers lower rates than your other forms of credit, then make use of them. They will save you a considerable amount of money over time.
We hope that this has cleared up a few issues that you might have with regards to secured and unsecured loans. Just remember that while debt can be useful, it can quickly become problematic – so be careful!