Pros And Cons Of Secured And Unsecured Loans

While many people live a cash-only lifestyle, some of us rely on credit to pay for some big expenses once in a while. You can apply for a loan at either your local bank or online to help you cover some really expensive purchases.

When considering your credit options, you might have to decide between a secured and unsecured loan. When you understand the differences between the two, you’ve completed an important step in achieving financial literacy; and can have a long-term effect on your financial health.

If you are interested in applying for a loan in Norway, you can find top recommendations for Norwegian finance companies on NorskeAnmeldelser but if you are still unsure what company to apply with, some customer reviews on Bondora should suffice.


Secured vs. Unsecured Loans

In simple terms, a secured loan requires borrowers to offer collateral in case you can’t pay back your loan while an unsecured loan does not (after the lender considers your financials). This difference affects your interest rate, borrowing limit, and repayment terms.

There are pros and cons to choosing a secured vs an unsecured loan so before you decide on which to apply for, it’s best to understand the strings attached. This is why we have highlighted the differences for you here:

What Is A Secured Loan?

A secured loan is a loan backed by collateral. The item purchased can be used as collateral. The most common types of secured loans are mortgages and car loans, and in the case of these loans, the collateral is your home or car.

But really, any financial asset you own can be used as collateral. And if you don’t pay back your loan, the bank or lender can seize your collateral as payment. A repossession stays on your credit report for up to seven years.

When you apply for a secured loan, the lender puts a lien on the asset you offer up as collateral. Once you pay back the loan, the lender removes the lien, and you own both assets free and clear.

Secured loans are not just for new purchases. It can also be home equity loans or home equity lines of credit.

Advantages of Secured Loans:

  • Lower Rates
  • Higher Borrowing Limits
  • Longer Repayment Terms

Examples of Secured Loans:

  • Boat loan
  • Mortgage
  • Auto loan
  • Home equity line of credit
  • Insurance policies
  • Stocks, mutual funds, or bond investments

Since your assets can be seized if you don’t pay off your secured loan, secured loans are arguably riskier than unsecured loans.

What Is An Unsecured Loan?

An unsecured does not require any collateral, though you are still charged interest and sometimes fees.

Examples Of Unsecured Loans

  • Student loans
  • Personal loans, and
  • Credit cards

Since there’s no collateral, financial institutions give out unsecured loans based on your credit score and history of repaying past debts. This makes unsecured loans have higher interest rates (but not always) than a secured loan.

Before you take out a personal loan, whether it’s secured or unsecured, make sure you have a clear payoff plan.

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