If you are unsure if a secured loan is right for you, you may want to consider the difference between this option and that of an unsecured loan.
Secured loan vs. unsecured loan -- how do you know which option is right for you? Mortgages and car loans are commonly secured loans while credit cards and personal loans are often unsecured.
The main difference between secured and unsecured loans is the security. With a secured loan, you are securing the loan by using an asset for collateral.
For example, with a home loan, the home itself is often the collateral. With a car loan, the car may be the collateral. If you fail to pay off the secured loan, the lender gets possession of the collateral.
The type of loan that you choose depends on several factors. You need to consider your credit history and the interest rates.
If you have bad credit, you may be considered a high risk for an unsecured loan. Your application may get denied or you may get a very high interest rate.
With secured loans, bad credit is less of an issue. The assets that you use to secure the loan reduce the risk for lenders.
The lower risk of secured loans also allows lenders to offer lower interest rates. You may even qualify to borrow a larger amount.
When it comes to secured vs. unsecured loans, it is more critical for you to keep making payments on your secured loans. Remember that secured loans are secured on an asset. If you fail to make your payments, you risk forfeiting that asset to the lender.
Failing to make payments on unsecured loans can also have negative consequences. Unsecured loans tend to have higher interest rates. When you miss payments, the cost is greater, increasing your total debt.
Whether you are having trouble paying off a secured or unsecured loan, there is help available. Credit counselors can offer free advice on dealing with your debt. By establishing a plan, you can eliminate the stress of dealing with rising debt.
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