Understanding the difference between the two is pretty critical when determining what loan type is your best choice. You'll accomplish the same with both, obtaining money. But each have very different costs/fees and terms associated with them as well as processes for obtaining.
Unsecured Personal Loans
An unsecured loan is typically used for an immediate cash need for a nominal expense. Like fixing your car or paying an unexpected bill. With this loan type, lenders determine your ability to make the payments on your loan by analyzing your credit score / rating. Therefore approval for unsecured loans is more difficult than secured loans. This is because you aren't securing your loan with any type of collateral, just your signature. For example, when you utilize an auto loan, you are securing your loan with the automobile. If you don't pay the loan, the lender takes possession of your car.
The interest rates of unsecured loans are usually greater than those associated with secured loans. Also, borrowing amounts of unsecured loans are also lower. Again, as a result of no collateral being tied to the loan.
The process of obtaining unsecured loans is simplier, with less paperwork, and quicker than that of secured loans. Typically, it takes 48 hours or less for funding to be accomplished with an unsecured loan.
Secured Loans
One would use a secured loan when looking to finance a large purchase. With this type of loan, you are securing your loan with some type of collateral. For example, an auto loan is a commonly used secured loan type. The lender of your loan is going to be the title holder of your car until you pay the loan off. In the event that you go into default on your loan, the lender is going to come and repossess your car.
The borrowing amounts of secured loans are usually much higher than those of unsecured loans. They also have longer borrowing terms. Interest rates are almost always lower as well since you are securing your loan. Secured loans have a lot more paperwork assoicated with them and can take several days or more to close.
Which is right for me?
It really is going to depend what the purpose of your loan is. Are you just in need of a few thousand dollars? If that's the case, then a personal loan is right for you. If you are looking for more money, say $35,000 or more, and you own a home, you may want to consider looking into a home equity loan. You will be able to utilize the existing equity from your home for obtaining the financing you need. If you need a loan for a car, then a secured auto loan is going to be your best option.
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Representative Personal Loan Example: For a $5,000 36-month loan at an interest rate of 6.03% with a 1.11% origination fee of $55.50, you will receive a loan amount of $4,944.50 and will make 36 monthly payments of about $152.18 at a 6.78% APR. Total loan cost would be $5,478.48.