What are the differences between secured and unsecured loans?

When you take out a loan, it’s important to choose the option best suited to your needs. For example, if you plan to buy a car, rather than a personal loan, you’d be best to look at vehicle financing.

But do you know whether your chosen loan is considered “secured” or “unsecured”? We have a look at what each of these refer to, as well as the impact this has on your repayments.  

Tip: A personal loan allows you to choose what you spend the loan on. Click here for more.

What’s the difference?

There’s one main difference between secured and unsecured loans: whether it’s “secured” to, or attached to, an asset.

Examples of secured loans are home loans and vehicle finance. In both of these instances, the loan is linked to its named asset – a home or a vehicle.

On the other hand, a personal loan is considered an unsecured loan. This is because it’s not linked to any asset and you can use it to purchase anything you choose.

READ MORE: How to calculate interest on your loans

What impact does this have?  

The most important impact of loan type, whether secured or unsecured, is the interest rate that creditors will charge you.

Since secured loans are tied to an asset, that asset is considered collateral in case you default on your monthly payments. This makes creditors feel more comfortable, because they can reclaim any losses. A lower interest rate will thus be offered to you.

The biggest determinant: Credit Score

Although the kind of loan you take out will always impact the interest rate, there is a factor that will sway creditors even more. This is your credit report, and more specifically, your credit score.

If you have a poor or average credit score and you apply for a secured loan, you may receive a similar interest rate to someone who has a great credit score and is looking for an unsecured loan.

It’s important to know, maintain, and if needed, actively work towards improving your credit score. This can be your biggest ally when it comes to financial health.

When last did you see your credit score? Get your credit report for free through CreditSav.