Know the Difference – Secured and Unsecured Credit

Secured and unsecured loans are two banking terms that categories the way in which a bank loan works. However, before going into a bank branch and applying for a loan, it is best if you have a clear understanding of what these two types of loan mean, what’s meant by collateral, it’s role including the positives and negatives regarding both options and other important information.

Secured and Unsecured Credit

It all starts when a bank agrees to give you money and you agree to pay them back on a monthly basis. The frequency and amount of such payments are called installments, so when you get a loan, you are accepting to pay them back in installments which will have some form of applied interest or potentially 0% interest for a specific period of time.

Now, depending on how good your credit score is, the bank can give you the money merely on the written promise that you will pay them back. That’s called an unsecured loan because there’s no asset or property backing up the promise that you will pay the money back. People with a good credit score and good financial history are often eligible for this type of loan.

If your credit score is not that good, then the bank will need something that guarantees that they will get the money back. Something that secures the loan in case something happens. Those are called secured loans.

Secured Loans

When a bank requires an asset or a property in order to safely lend money to someone it means that they can have ownership over your property in you fail to pay them back, this is called Foreclosure.

Houses and cars are the most commonly used assets. Sometimes even after taking ownership of an asset, the debtor still owes money to the financial institution. The property or asset itself is known as collateral.

Unsecured Loans

This type of loan assures that the lender has no rights over the debtor’s property or any asset. Being eligible for this type of bank agreement depends mostly on the person’s credit score.

The credit score is a report that credit bureaus put together and it compiles every person’s bank history. It includes how good people have managed their financial things and how likely they are to pay the money back on time and responsibly.

Some important aspects also vary for each type of loan, for instance, secured loans will have higher amounts while unsecured loans will handle smaller amounts. Also, secured loans have smaller interest rates than any other type of loans and usually, unsecured loans come with higher interest rates.

Both types of loans are reported to bureaus, including late payments and similar. In the event of foreclosure, it will also be listed in the report.

Which one is better?

It is highly unlikely that a person with good credit would choose a secured loan – and compromise an important asset, like a house – over an unsecured one, but for people with low or bad credit score sometimes it’s the only option.

As mentioned before, secured loans do provide higher sums which can be appealing but it can never be enough to actually risk your house.

Also, it is important that people go beyond in their search and have a clear understanding of other important matters, like repayment period and interest rates.

If I don’t have a good credit score, what other options do I have?

The best option is to start rebuilding a good credit score. Sacrifice and commitment are the best ways to little by little start gaining trust from lenders again. You need to know that these things take time, it won’t happen overnight.

If you simply can’t wait and need a financial boost immediately, perhaps you can check if in the past you were mis-sold a PPI policy. If that’s the case, you can reclaim your money back and make good use of it.

That way, you avoid adding any new credit to your existing ones and also you avoid compromising the valuable assets you may already have.

Find out if you have a genuine mis-sold PPI claim so you can reclaim money that is rightfully yours. Just make sure you remember that the government has set August 29, 2019, as the final date for people to reclaim mis-sold PPI policies from the past.


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