Secured Versus Unsecured Personal Loans

Is a secured personal loan the same as an unsecured personal loan? While they both have some elements in common, you should learn some key differences as you research your lending options. Knowing how these two types of personal loans differ can help you widen your loan options and improve your chances at being approved for the financing you need.

The main difference between secured and unsecured personal loans is that a secured loan, as the name implies, is backed by a guarantee. This guarantee can be a car that you hold the title to or a home or apartment you own. Using your personal property can be a higher risk as you could lose that property should you fail to make payments on the loan. Unsecured loans are safer in that they don’t require the use of any collateral and the approval is based on your personal credit history. However, unsecured loans typically have higher interest rates as a result.

For an unsecured personal loan, since there is no collateral guarantee, the approval process involves reviewing the information contained in your credit report. The contents of your report – including your credit score – are the factors used by a lender to determine whether you should be approved for the loan. The lender also takes into consideration whether you’re able to repay the debt. This means a review of your income and any savings, as well as calculating your debt-to-income ratio. This number shows how much debt you have in relation to your income. By figuring out your debt-to-income ratio, the lender can use that to see if you’re able to take on the additional debt that a loan will bring.

Another difference between secured and unsecured personal loans is that an unsecured personal loan comes with paperwork beyond the standard loan application. Applying for an unsecured loan might require you to verify statements on the loan application. These statements include facts like your current income and your home address. The documentation needed as verification includes a copy of your most recent paycheck stub to show income, or a utility bill for proof of residence.

When it comes to the interest rate for an unsecured personal loan, which is higher than that of a secured loan, the interest is calculated using three separate variables. These variables are:

  1. Your total outstanding balance;
  2. Your rate of interest; and
  3. The term of the loan.

The way your interest payment would be calculated is by applying the monthly interest rate to the outstanding balance. What happens over the course of your loan is that the monthly interest payment would decrease with every month as you pay down your loan and decrease your outstanding balance. Your total principle payment would increase each month until you reach the end of your term and pay off the loan. Most lenders will compound the interest on a monthly basis. Every lender will handle interest and compound interest differently, so be sure to carefully review their terms and conditions before starting the application process.

To learn more about the difference between secured and unsecured personal loans, AmOne has financial search specialists available to help. Our free service can help to match you with the highly rated lender that best suits your financial needs. Fill out our unsecured loan solutions form or contact us today. You can call AmOne toll-free at 1-800-781-5187. You can reach us Monday through Friday from 9:00 AM to 9:00 PM and on Saturday from 9:00 AM to 5:30 PM Eastern time.