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Secured vs. Unsecured Loans

Sometimes, your big purchases require you to take out a loan. Loans often cover expenses like home, college tuition or car payments. Whatever you're looking to buy, knowing the difference between various loan types allows you to choose the best options for your situation.

What Is a Secured Loan?

A secured loan is any borrowed money backed by collateral. Collateral is a financial asset you offer to give the bank if you don't repay the loan. The most common types of collateral include a car or home, used in car loans and mortgages. Other examples of collateral include bank accounts (i.e. savings), stocks and life insurance policies. 

These loans are called “secured” because the bank has protection against risk. If a borrower doesn't repay the loan, the lender gets the house, car or other collateral.

What Is an Unsecured Loan?

An unsecured loan has no collateral behind it. Some common unsecured loans include student, personal and credit card loans. Lenders have more risk with these loans because they have no financial assets from the borrower backing them. To limit their risk, banks use information like credit scores and past debt repayment history to see if you're eligible. A good history means you're more likely to repay the money, increasing the chances of lenders giving you a loan.

How to Decide Between a Secured vs. Unsecured Loan

As you consider your lending options, you may wonder which is right for you. Sometimes, you won't have a choice, as the loan depends on your lender and your reason for borrowing. For example, if you seek a mortgage loan, it will be secured by your home. In cases where you need to decide between these two loan types, here are some points to consider:

  • Restrictions: Secured loans may be easier to qualify for with a weak or unproven credit history because the lender has less risk. 
  • Interest rates: You will get lower interest rates with a secured loan because the bank has collateral, which lowers the risk of the bank losing money if you do not repay the loan.
  • Borrowing limits: With high-value assets like a car or house backing your loan, a secured loan offers higher limits for borrowing.
  • Risk level: When you get a secured loan, you may lose the collateral, like a home or car, if you don't pay back the loan, making it a riskier choice.

Learn More About Borrowing

At First Commonwealth Bank, we aim to grow your financial confidence through education about topics like borrowing. You can connect with our team online to learn more about loan types, or stop in to see us at your local community office.