If you plan to apply for a personal loan, it's best to understand the difference between secured and unsecured personal loans. Knowing the difference between the two can help you make the right decision. 

These factors can also help determine how likely you are to get approved for the loan, how much the interest rate will be, and whether you have to put your property on the line to get a loan.

Where to Get a Personal Loan

Several lenders can help you get a personal loan. It includes banks, credit unions, and online lenders.

Personal loans tend to vary greatly depending on the lender. They differ in interest rates, loan qualifications, and terms. However, banks often choose to lend to borrowers with excellent credit scores. 

Credit unions tend to be less strict with the requirements and can also grant you a personal loan with lower interest rates. But you'll need to become a member to get these benefits.

On the other hand, online lenders, like CreditNinja, may offer a personal loan with lower interest rates to borrowers with good credit. Online lenders can also be very convenient since the loan process is online. You don't have to leave the house and drive somewhere to apply and get approved.

Secured vs. Unsecured Personal Loans

Secured and unsecured personal loans significantly differ in terms of collateral, interest rates, and borrowing limits. Below are there differences in each factor:

The Need for Collateral

A secured personal loan will require you to risk your property and pledge it as collateral for the loan approval. By doing so, you agree that if you fail to repay the loan within a certain period, the lender can take the collateral. 

If you get a mortgage or auto loan, the collateral is usually a house or a car. However, a certificate of deposit or money in your savings account can also act as collateral for secured personal loans.

Conversely, an unsecured personal loan will not require you to risk your property to get approved. If you fail to repay the loan, the lender can't take any of your property to compensate for your balances.

Remember that both types of personal loans involve a credit score risk. Late or missed payments will hurt your credit score, which will make it challenging for you to get approved for any other type of credit in the future.

Interest Rate

Typically, an unsecured personal loan has a higher interest rate than an unsecured personal loan. It's because an unsecured personal loan is considered riskier by lenders. In addition, without the need for collateral, lenders won't have any assurance for compensation if you fail to repay the loan.

Personal loans are usually unsecured. In August 2020, Federal Reserve data indicated that an unsecured personal loan's average annual percentage rate (APR) was 9.34%. It was based on a 2-year loan term. 

Taking out a secured personal loan would mean that you can have a lower interest rate. It's because you pledge your property as collateral, which guarantees the lender that the loan payments will get compensated even if you fail to make repayments. It's less risky for the lender but riskier on your part due to a loss of property on the line.

Borrowing Limits

Since a secured loan involves risking your asset, lenders tend to approve higher borrowing limits for this type of loan, which means you can access more money. Unsecured personal loans, on the other hand, tend to have lower borrowing limits. The loan amount usually ranges from $1,000 to about $40,000, depending on the lender.

Which Is Right For You?

Choosing the type of personal loan that's best for you depends on your financial history, credit score, and the loan amount you need. If you are confident in making on-time payments, a secured personal loan can provide you with a lower interest rate and a higher borrowing limit. This type of loan can also be the best choice if you currently have bad credit.

On the other hand, if you don't want to risk any of your assets, an unsecured personal loan might be the right choice. The interest rate for this type of loan might be higher. However, it will not be a problem if you have excellent credit.

To Wrap It Up

If you want a personal loan, you will have to choose between secured or unsecured loans. The difference between the two can be seen in the need for collateral, interest rates, and borrowing limits. Understanding these types of personal loans and assessing your current financial situation will make it easier for you to make the right financial decision.