Before you start shopping around for a loan, it is important that you understand the difference between unsecured loans and secured loans, as the choice of one or another can save you money in interests that lending companies set. Moreover and depending on your credit history, you might find that it is easier to apply for some types of loan than others, although payday loans can be easier to get, as they are not approved based on your credit score.
These types of loans are considered unsecured debt. This means that your credit history is enough to approve your credit and the debt will not be collateralized by any asset or lien that guarantees the repayment of the loan in case of failure to abide by the terms of the lender to repay, or when the borrower files for bankruptcy or liquidation. Payday loans, as an example, are not considered unsecured loans as many lending companies may try to make you believe.
On the other hand, secured loans are debt that requires you to pledge a valuable or asset that is used as collateral for the amount of money borrowed. Pledging a property to the lender is the most common request when it comes to secured loans, although in the case of payday loans, the debt is secured by your paycheck and lending companies may accept cars, boats, and fine art or jewelry pieces to secure the debt in case of insolvency.
As noted above, payday loans are unsecured debt and not a third debt option as many people think. The only difference is a payday loan has when it comes to comparing it with other unsecured loans, is that a payday loan lender will not approve your application based on your credit history because it is money that you are borrowing upon your paycheck, which acts like collateral in this case.
Choosing Secured Loans
Before making a decision to determine which loan is better for you, learn first what the pros and cons are of taking out a secured loan, including these:
• Bad credit or no credit history determines to get an application approved
• You can usually borrow more money than you can with an unsecured loan
• Secured loans provide you with longer repayment periods
• Higher interest rates when compared with unsecured loans
• Risk of losing the asset that have been pledged
• Risk of getting interest rates increased overtime
Choosing Unsecured Loans
Now, compare what are the advantages and disadvantages are of unsecured loans, so you can make an educated decision once you start to shop around for yours:
• No collateral is required
• Short term periods to repay
• Fast turnaround as with payday loans
• High risk factor to get your application declined
• Risk that will affect your credit history if you fail to repay timely
Your financial needs are unique, as unique is your credit background. So with that, determine your chances to be approved when applying for a secured or unsecured loan and find out what is an unsecured loann, or consider payday loans when quick cash is what you need.