When you want to take a personal loan, it makes sense to analyze carefully whether you need to take a secured or unsecured one, before applying. In certain situations, you may qualify only for a secured loan – in particular if you have a bad credit score or no credit history. In other cases, you have several options, and whether you decide for one type or the other depends entirely on your situation, since both have advantages and disadvantages.
Advantages of Secured Personal Loans
The main difference between secured and unsecured bad credit loans is simple: for secured loans, you have to use a collateral – a house, another piece of property, a vehicle, such as a car or a boat, jewelry, artwork – basically, anything that holds some monetary value. If you fail to repay the loan on time, the lender may take the collateral instead.
Because the risks for the lenders are relatively low, secured personal loans are among the most flexible credits available on the market: the amount you borrow can be tailored to suit your needs, and it depends on the collateral you want to use. Also, the interest rates are typically lower than for other types of loans, and the term varies depending on the amount borrowed, and it can reach up to 30 years.
Even if the interest rate seems great at the first glance, secured personal loans may have other costs, which you should calculate before applying. For instance, the lender may ask you to take some insurance for the assets used as collateral, and the insurance premium will continue to add up to your costs for the entire term of the loan.
Also, the lender may want to conduct an independent appraisal for the collateral in question, and you will have to cover those costs as well. And, of course, the biggest risk with secured loans is losing your assets, in case you cannot repay your debt, so make sure you do not rush into making any decision until you have a sound and realistic repayment plan.
Advantages of Unsecured Personal Loans
Unsecured loans may also be called signature loans, since the only guarantee for the lender that you will repay your debt is your signature on the documents. These loans are usually on a short term (between one and five years), and carry high interest rates, to cover the lender's additional risks. If you need to borrow a large amount, you need a good credit score and a stable employment history in order to qualify for an unsecured loan.
It may seem that unsecured loans have only disadvantages, but that's not entirely true: they can be used to cover small unexpected expenses, such as medical or funeral bills, without the stress of putting your home at risk in the process. In addition, because the term is short, the interest rates do not accumulate for many years, keeping the total cost of the loan within reasonable limits.
Certain types of unsecured loans are very flexible, but also very expensive. The payday loans are the best know in this category: these are useful when you need a small amount for a couple of weeks, but they also carry high costs.