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Learn About Personal Loans

What’s the Difference Between a Secured And Unsecured Loan?

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What is an unsecured loan?

An unsecured loan is not protected by collateral, like a car or a house. It can allow you to borrow money for various reasons, like to consolidate debt or pay for a wedding. The applicant’s overall credit profile, rather than collateral, plays a role in unsecured loan decisions.

Common types of unsecured debt include:

  • Student loans
  • Credit cards
  • Personal loans

There are many points to consider if you’re looking to pay down debt with an unsecured loan. Here are a few important advantages to an unsecured personal loan:

  • You can get a loan without having to leverage any of your assets to secure funds.
  • Loan approvals can be completed faster because there are no assets to valuate.
  • Unsecured loans may be a better option for borrowing smaller amounts.

Some of the disadvantages include:

  • You may have to pay the loan back over a shorter period of time, though this depends on the lender. Discover Personal Loans has flexible terms from 36 to 84 months.*
  • No collateral might mean that you pay a higher interest rate because the risk may be greater to the lender. A strong credit profile could offset this disadvantage.
  • If you need a larger amount for debt consolidation, it may be harder to get approved without collateral. Again, this depends on your credit score.

Discover Personal Loans understands that paying off credit cards and consolidating other high-interest debt is a sensitive subject. That’s why we’ve made the process of applying for a personal loan as streamlined as possible, with flexible repayment terms and same-day decisions in most cases.

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What is a secured loan?

A secured loan requires you to offer an asset as collateral, often times equal to the amount you’re requesting. The most commonly used assets are borrowers’ homes and cars, but a wide range of other valuables can be used, including cash. The secured loans you’re most likely familiar with include:

  • Mortgages
  • Auto loans
  • Home equity loans and credit lines

Secured loans allow borrowers to request larger amounts of money, sometimes equivalent to the value of their collateral, at a reduced risk to the lender. For example if you use your car as collateral for a secured loan and it’s valued at $15,000, you may be able to request up to that amount. Like anything, secured loans have their advantages and disadvantages.

Some advantages of secured loans include:

  • You may request larger amounts of money because of the reduced risk to the lender.
  • Some lenders offer longer repayment terms and lower interest rates than those assessed for unsecured loans.
  • It may be easier to get a secured loan because you must first offer up collateral.

While the advantages sound pretty good, secured loans may not always paint rosy a picture. Some of the disadvantages include:

  • If you default on the loan, you could lose your collateral (your car or your house).
  • Secured loans may sometimes have variable interest rates.
  • Secured loans may have some restrictions, like a minimum balance on the bank account you use as collateral, or lack of flexibility on what you can use the money for.
  • The loan decision time may be longer since the value of your collateral needs to be verified.

Secured vs. Unsecured Loans: Which is right for you?

The question of secured vs. unsecured loans really comes down to what you need and how much risk you’re willing to assume to accomplish your financial goals. If your goal includes consolidating or paying down higher interest debt, an unsecured personal loan may be the option that’s best for you. An unsecured loan, like a Discover personal loan, has many advantages — fixed rates, flexible terms and same-day decisions in most cases, plus funding up to $35,000. While you could get more money with a secured loan, you, as a borrower, assume the risk of forfeiture of your collateral.

Becoming more financially secure is a journey we all take at one time or another. When you’re equipped with the information to make the best decisions possible, the road to paying down debt is a little less windy. Discover Personal Loans works with each customer to align them with an unsecured personal loan based on their needs. Discover makes recommendations tailored to you, so when you apply for a personal loan online, you can be confident in your journey.

*Your APR will be between 6.99% and 24.99% based on creditworthiness at time of application for loan terms of 36-84 months. For example, if you get approved for a $15,000 loan at 6.99% APR for a term of 72 months, you’ll pay just $256 per month. Our lowest rates are available to consumers with the best credit. Many factors are used to determine your rate, such as your credit history, application information and the term you select.