Secured vs Unsecured Loan

When an institution or individual lends you money, it will be in the form of either a secured or unsecured loan.

A secured loan is when the lender offers an item of value to serve as collateral in the event that the loan “defaults”, or is not paid back on time and in accordance with the agreement of a loan. An example of a secured loan is when an individual uses their car as collateral. If the lender fails to make their loan payments, the lending institution or individual will then take control of the car and sell it to recover their money.

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Except for loans from family members and close friends, most loans will be secured loans. Secured loans are usually larger, with lower interest rates, and long periods to repay the loan than unsecured loans.

Unsecured personal loans are when money is borrowed without the borrower pledging any assets or valuables as collateral. A common form of unsecured loan is a credit card. Every time you use a credit card, you are borrowing money from the credit card issuer, having pledged to repay the amount plus any applicable fees and interest. Because unsecured loans are riskier for the lender, they usually come with higher interest rates and shorter repayment periods.