What's the Difference Between a Secured and Unsecured Personal Loan?
- Better Borrowing
- Frontwave Credit Union
You’re probably familiar with auto, home and student loans, but did you know you can also get a loan for just about anything you’re dreaming of? With a personal loan, you can plan the trip of a lifetime (hopefully soon!), invest in new home furnishings, buy new equipment for your small business, or even pay for unexpected expenses.
When comparing personal loans, not only do you want to look at the interest rates, payments and terms, it’s also important to look at the type of loan — namely, whether it’s a secured or unsecured loan. Let’s look at the difference.
Secured vs. Unsecured
A secured loan, personal or otherwise, is one that’s backed up by collateral. For example, an auto loan is a secured loan because it’s backed up by the vehicle itself. That means if you stop making your payments, your lender can repossess your vehicle and sell it to cover the amount left on the loan.
So how do you secure a personal loan for something like a vacation or furniture? No, your lender won’t take your plane tickets or your couch if you don’t pay your loan. Instead, here at Frontwave, you can use the funds you have deposited in your Frontwave account(s) as collateral for your secured personal loan. This allows you to spend up to the amount you have in your savings, without actually depleting your savings.
An unsecured loan, just as it sounds, is not backed by collateral. Here at Frontwave, we call unsecured personal loans “Signature Loans” because all we need is your signature as promise that you’ll pay back the loan.
Pros vs. Cons
Because secured personal loans are backed by collateral, they’re generally easier to get. That’s because there’s less risk to the lender if you don’t pay your loan. So if you have less than perfect credit and have been turned down for an unsecured loan or a credit card, a secured personal loan can be the way to go. It can give you access to the money you need without using up all your savings — all while helping you rebuild your credit as you make your monthly payments.
On the flip side, unsecured personal loans generally have stricter requirements and credit standards. In some cases, they may have higher interest rates as well. That’s because the risk to the lender is greater if you don’t pay back the loan. But don't think not putting up collateral gets you off scot-free if you don't pay. It can seriously damage your credit and make it a lot harder to get a loan in the future, especially another unsecured loan.
Personal Loans vs. Credit Cards
Now that you know about the different types of personal loans, you may be wondering what sets them apart from credit cards. Truth be told, credit cards are also a type of loan. And they can be secured or unsecured. The main difference is that with a personal loan, like our Signature loan, you get all the money at once and have a set period of time to pay it back. You also get a set monthly payment that doesn’t vary.
With a credit card, on the other hand, you get a set amount you’re allowed to borrow against (your credit limit), but you don’t have to use it all at once. However much you choose to use affects how much you owe each month, meaning your monthly payment can vary. There’s also no end to your credit card “loan” – so you can have the same card for 5, 10, 15 years or more.
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