Secured and unsecured loans: which one is best for you?

secured and unsecured loans

If you’re thinking about applying for a personal loan, you should first understand the difference between secured and unsecured loans.

The difference could affect how likely you are to get approved for a personal loan, the interest rate you’ll get, and whether you’ll have to risk some property to get the loan. Let’s look at how both work as well as some things you should know in order to decide which type of personal loan is right for you

 What is an unsecured loan?

An unsecured loan is a loan where you don’t put any form of collateral as a guarantee for the loan. Unsecured loans are ideal for those who don’t have any assets to pledge as collateral. However, unsecured loans are considered the highest risk type of loan as the lender is trusting your ability to repay the loan without collateral. If you don’t have any assets to offer as security, the lender doesn’t have any assurance that they will be paid back. You’ll generally need a strong credit history and a higher score to qualify for an unsecured loan. Unsecured loans typically come with higher interest rates as well

 What is a secured loan?

Unlike an unsecured loan, a secured loan requires you to pledge some sort of asset either as collateral or security. The most common forms of secured loans are title deed loans, logbook loans, and mortgages. In a title deed loan, you are required to pledge one or more of your properties as security.

In a logbook loan, the lender is given a lien on your car’s title so that they can recover the loan in case you default on the payment. This kind of loan improves your credit score by providing a way for the lender to verify your ability to repay the loan. A secured loan is the best option for those who can use the asset as collateral or security for the loan.

Mwananchi Credit offers different types of loans including the above-mentioned logbook and title deed loans, that are given with installment plans that are calculated at the time of borrowing. Most credit firms offer from as low as 30% on the value of the car but Mwananchi Credit offers up to 90% of the car value, with newer models fetching a higher ratio for the logbook loans.

Like most secured loans, there are specific interest rates from as low as 1.6%, based on the repayment plan and amount borrowed.

 

Pros and cons of an unsecured loan

Pros

No credit score required

Unsecured loans are great for anyone with a poor credit score who doesn’t have any assets to pledge as collateral. Unsecured loans do not require any credit score and thus are ideal for those with bad credit history.

No collateral required

The advantage of an unsecured loan is that you don’t need any collateral. So, if you have a poor credit history, an unsecured loan is a great alternative to improve your credit score and financial standing.

No risk to personal property

The good thing about having an unsecured personal loan is that your personal property usually isn’t at risk in the event of a default. So you won’t have to worry about losing your home or any of your other assets if you get laid off and making on-time payments becomes difficult or impossible.

The application process is simpler

Since there are other lenders besides banks and credit unions that offer personal loans, the process of getting one isn’t as complicated as it once was. You can apply for a loan from a peer-to-peer site from the comfort of your own home. And it’s possible to get approved for one in less than 24 hours.

Cons

If you default, your lender could come after you.

Even if a personal loan isn’t backed by a particular piece of personal property, a lender may still be able to place a lien on your assets in order to secure repayment. In order for a lender to obtain a lien, he must sue you in court. In addition to paying for the original loan amount you borrowed and late fees, you could be forced to pay for attorney fees and court costs.

Loan amounts may be smaller.

It’s no secret that lenders make money by charging interest on loans, but there’s no profit if the loan is not repaid. That’s why lenders go to great lengths to limit the risk of borrower default. They check credit reports, verify employment and in the case of unsecured personal loans, they might limit the amount of money they lend you (especially if your credit score is low).

Higher interest rates

Because unsecured loans are backed only by trust, they’re more of a risk for the lender, the higher the risk the higher it costs to borrow; borrowers with bad credit will face high-interest rates on an unsecured bad credit loan, if you have a good credit rating, however, this will not be so much a problem for you.

If you have a good credit rating and need a small loan, an unsecured loan is ideal for you.

Pros and Cons of a secured loan

Pros

Quick approval of loans

We at Mwananchi Credit offer quick loans through our relatively simple and straightforward process that is also free of charge.So what are you waiting for?Apply Today!

High loan amount

The loan amount is fixed at about 80%-90% of the value of the collateral you submit to the lender. So, if the value of the collateral is quite high, the eventual loan disbursal amount could be higher and help you meet your needs efficiently

Low-Interest Rates

You can get a lower rate of interest on a loan backed by collateral compared to an unsecured loan. This is because of the security you provide to the lender. The credit score may not hold importance, but if it is good, you may get the loan at a much lower rate.

Build credibility

Yes, you can build your credit history faster by making timely payments on the secured loan. Because it shows how dedicated you are when it comes to paying the due on time. A good credit score lends credibility and makes you eligible for credits you may require in the future

Cons

Loss of asset

From the beginning of the loan, the borrower should be aware of the risk associated with the borrowed amount. Because if you won’t pay for the loan, the lender may cease your security whatever you might have given to the lender.

Effect on Credit Score

The non-payment not only leads to the loss of assets but it severely damages your credit score. Which makes it difficult for you to take a loan in the future.

Secured and unsecured loans FAQs

What happens if you default on an unsecured loan?

Failing to repay any debt will have a negative effect on your credit. Although you don’t have to worry about losing your collateral with an unsecured loan, the cascading effects of falling behind in your payments can do real damage to your credit and your finances.
Late payments made 30 days or more past the due date will Lower your credit score and remain on your credit report for seven years. If a lender puts your account into collections or takes legal action against you, this information also becomes part of your credit history. Collections and civil judgments remain on your credit report for seven years from the date the account first went delinquent or from the date a ruling was made against you. Serious delinquencies are a red flag to future lenders, who will think twice before extending credit to you

What happens if you default on an unsecured loan?

Failing to repay any debt will have a negative effect on your credit. Although you don’t have to worry about losing your collateral with an unsecured loan, the cascading effects of falling behind in your payments can do real damage to your credit and your finances.
Late payments made 30 days or more past the due date will Lower your credit score and remain on your credit report for seven years. If a lender puts your account into collections or takes legal action against you, this information also becomes part of your credit history. Collections and civil judgments remain on your credit report for seven years from the date the account first went delinquent or from the date a ruling was made against you. Serious delinquencies are a red flag to future lenders, who will think twice before extending credit to you

 

Which type of loan is right for you?

There is no right or wrong answer to this question as both secured loans and unsecured loans have advantages and disadvantages. However, if you have the ability to pledge some sort of asset as security for the loan and you are comfortable with the higher risk of default, then a secured loan is the best option for you. Unsecured loans are best for those who don’t have any assets to pledge as security for the loan. But if you do have some sort of collateral to offer, then a secured loan is the best option as it improves your credit score and provides a way for the lender to verify your ability to repay the loan.

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