Heather Halpern

Secured vs. Unsecured Loans We live in a world where our society has become more and more dependent on credit. Less and fewer people live a cash-only life. This is because credit has become more readily available. Back in the times of living on the wide-open prairie, the only form of credit a person could get was an account at the local town store. Store owners allowed families to have a rolling account where they could purchase goods throughout the week or month and pay for them once they received their next source of income. Nowadays, credit can be found in the form of mortgages, car notes, major credit cards, and personal loans. Heck, even gas stations are offering consumer credit cards for the purchase of gasoline. When choosing between available forms of credit, a consumer may decide a loan is the best option to fit their needs. If this is the case, that consumer will be offered two choices: A secured loan or an unsecured loan. Making the right choice is crucial for each consumer. We will outline the differences between both types of loans and discuss what their pros and cons consist of. Secured Loans: Secure loans are the most common way to borrow large amounts of money. They are backed by consumer collateral. Collateral is defined as, “something pledged as security for repayment of a loan, to be forfeited in the event of a default.” Putting an expensive item on the line is a surefire way for the lender to feel comfortable lending a consumer money. Typically, the collateral being used is the actual item that is being purchased. When financing a car, the dealer holds the car title until the car loan is paid off. When purchasing a home, the mortgage company will hold the deed until the home is paid off. These are two of the most common examples of secured loans. Personal property can also be used as collateral. This is how pawn shops usually operate. A consumer can leave an item of value with the pawnshop to receive a small loan. If the consumer does not return in the allotted time frame, the pawnshop then owns the item left by the consumer. Bonds and stocks can also be used as collateral. Secure loans are a great way to make new purchases but they can also be used to secure a new line of credit. I’m sure you’ve heard of home equity lines of credit or home equity loans. These types of loans also use your home as collateral. Home equity loans are calculated by misusing the amount still owed on the home from its current value. When taking out a secured loan, the lender will place a lien on the item you offered as collateral. Once you pay off the loan in full, the lien is removed by the lender and you own the purchased item and the collateral item 100%. Unsecured Loans Unlike secured loans, unsecured loans require no collateral. Unsecured loans are provided by financial institutions. These loans are based on a consumer's past debts and current credit score. Since unsecured loans are not backed by any tangible item, they usually have a higher interest rate and associated fees. Take a peek at recent unsecured loan statistics below: The average balance for new unsecured personal loans was $4,815 in Dec 2020, which was roughly $1,400 less than in 2018 In 2020, unsecured personal loans had a delinquency rate of just 3.04%. That is a 0.79% drop since 2016. In December 2020, the average loan size was $4,815, which was a 20% decline of roughly $1,197—from January 2020 A lender grants an unsecured loan based on the consumer’s financial resources. They will take into account the 5 C’s of Credit. We’ve outlined these below for your reference. Character: This is the most comprehensive part of determining the consumer's creditworthiness. This includes credit score and management of past accounts Capacity: This looks at the consumer's actual ability to repay the loan and determines risk exposure for the lender. They will look at the history of employment, income, current job stability, and current debt. Collateral: This is the research and confirmation of personal assets that may be offered as collateral, like a car or home. This is typically not used in unsecured loans Capital: This looks at the consumer’s assets. It includes investments, savings accounts, land ownership, and jewelry. While loans are usually paid off utilizing a consumer’s overall income, lenders for security in case the consumer becomes unemployed. Conditions: This deals with the specifics of the transaction. Lenders look at risk here based on how the consumer will utilize the money if the loan is approved Both secured and unsecured loans are beneficial to consumers. Each has its requirements, pros, and cons. Take time to conduct research before committing to either type of loan. Determine which type of loan is best suited to fit your needs.