Your transmission died and you need a new car. Your water heater broke and you received a large medical bill. And all of this happened while you’re in between jobs.
Life happens, and now, despite your best efforts to live from an emergency savings account, you need a personal loan to pay for the damages.
By “personal loan,” I’m not referring to a loan from a friend or family member. Instead, I’m referring to a loan from a company like SoFi, Avant, Prosper, or Lending Club, which gives loans to individuals.
You need to decide whether to apply for a secured loan or an unsecured loan. Which is better? To answer that question, you need to know the basic differences of the loans before deciding which is right for you.
Secured personal loans
Secured loans offer the least risk to lenders. If you get approved for a secured loan, you’ll have to offer up something of value as collateral.
Examples of secured loans:
- (Some) personal loans
- Mortgages
- Home equity loans
- Home equity lines of credit
- Car or vehicle loans (including RVs, boats, etc.)
The lender will hold the title or deed of your collateral until you repay your loan in full. If you don’t make your payments, the lender will be able to recoup their losses by going after the item of value you put on the line to get the loan. Your car, your house, or extra vehicles like motorcycles or RVs are typical examples of collateral.
Secured loans typically have lower interest rates. However, since secured loans are usually for larger amounts, the payback period can be up to 30 years in some cases, meaning you could end up paying more in interest in the long run.
Unsecured personal loans
Unsecured loans don’t require collateral. However, because they mean more risk for the lender, the interest rates on unsecured personal loans will be much higher than secured personal loans.
Examples of unsecured loans:
- (Some) personal loans
- Student loans
- Small home improvement or repair loans (usually less than $5000)
- Personal lines of credit
Unsecured loans can be difficult to get, especially if you have a low credit score. The higher your credit score, and the better your credit repayment history, the more likely you are to be able to get an unsecured personal loan with a good interest rate. Also, because of the risk to the lender, companies typically don’t offer unsecured loans without a cosigner for more than $5,000.
If you need a loan but don’t have anything of value to offer as collateral, an unsecured loan cosigned by someone with a better credit score may be your only option.
If you aren’t able to make your payments, the cosigner would be responsible for paying back your loan. (Read: don’t ever put a friend or family member in this position unless you have no other choices. Friends don’t let friends cosign on loans).
Which is best: secured vs. unsecured loan?
Secured and unsecured loans affect your credit score similarly. Borrowed money is debt, secured or not.
Despite their basic differences, secured and unsecured loans have similarities. Late payments affect your credit score and repayment history the same way, for example. A single 30-day late payment can drop your credit score by 60 points or more.
The default process on both loans work the same way as well. If your account is 150 days overdue or more, the lender will report your default to the credit bureau.
Lenders can either repossess your collateral items for secured loans or pass your debt to collection companies. They can even elect to take you to court to recoup their losses. If you lose in court, you could end up facing wage garnishment and tax refund withholding.
Defaulting on a personal loan for a home (i.e. foreclosure) can affect your credit score for seven years. If you decide to get a secured loan, make sure you have the income security to make payments on time.
The bottom line
Secured and unsecured loans aren’t better or worse. They’re just different. Debt is serious business, and both types of loans can carry dire consequences.
If you get a secured loan, will you be willing to lose your house or car if you’re not able to make payments? If you get an unsecured loan, are you willing to deal with the threat of collections or wage garnishment?
If you need a loan, think carefully about whether you’re able to make the payments – and also, whether you’re willing to deal with the consequences if you can’t.
Avoid taking on new debt, if possible, by using your savings or finding another way to deal with your problem without taking out a loan. Trim your spending in other areas of your life. Find ways to earn extra money on the side.
If you do need to take out a personal loan, understand the distinctions between the various loan products offered by banks and financial institutions. Take out the smallest loan amount that you need, and repay it as quickly as you can.
Interested in a personal loan?
Here are the top personal loan lenders of 2018!| Lender | APR Range | Loan Amount | |
|---|---|---|---|
1 Includes AutoPay discount. Important Disclosures for SoFi. SoFi Disclosures
2 Includes AutoPay discount. Important Disclosures for Payoff. Payoff Disclosures
3 Important Disclosures for FreedomPlus. FreedomPlus Disclosures
4 Important Disclosures for Citizens Bank. Citizens Bank Disclosures
5 Important Disclosures for LendingPoint. LendingPoint Disclosures
6 Important Disclosures for LendingClub. LendingClub DisclosuresAll loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.95% to 35.89%*. The origination fee ranges from 1% to 6% of the original principal balance and is deducted from your loan proceeds. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at the time of application. The average origination fee is 5.49% as of Q1 2017. In Georgia, the minimum loan amount is $3,025. In Massachusetts, the minimum loan amount is $6,025 if your APR is greater than 12%. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months. Borrower must be a U.S. citizen, permanent resident or be in the United States on a valid long term visa and at least 18 years old. Valid bank account and Social Security number are required. Equal Housing Lender. All loans are subject to credit approval. LendingClub’s physical address is: LendingClub, 71 Stevenson Street, Suite 1000, San Francisco, CA 94105. †Per reviews collected and authenticated by Bazaarvoice in compliance with the Bazaarvoice Authentication Requirements, supported by anti-fraud technology and human analysis. All reviews can be reviewed at reviews.lendingclub.com **Based on approximately 60% of borrowers who received offers through LendingClub’s marketing partners between January 1, 2018 to July 20,2018. The time it will take to fund your loan may vary. 7 Important Disclosures for Earnest. Earnest Disclosures
8 Important Disclosures for Avant. Avant Disclosures* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC. ** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33 * Important Disclosures for Upgrade Bank. Upgrade Bank Disclosures* Your loan terms are not guaranteed and are subject to our verification and review process. You may be asked to provide additional documents to enable us to verify your income and your identity. This rate includes an Autopay APR reduction of 0.5%. By enrolling in Autopay your payments will be automatically deducted from you bank account. Selecting Autopay is optional. Annual Percentage Rate is inclusive of a loan origination fee, which is deducted from the loan proceeds. Late payments or subsequent charges and fees may increase the cost of your fixed rate loan. All loans made by WebBank, member FDIC. Please refer to Upgrade’s Terms of Use and Borrower Agreement for all terms, conditions and requirements. ** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days. |
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 | 7.73% – 29.99% | $1,000 - $50,000 | |
 | 6.26% – 14.87%1 | $5,000 - $100,000 | |
 | 6.99% – 35.97%* | $1,000 - $50,000 | |
 | 5.99% – 24.99%2 | $5,000 - $35,000 | |
 | 4.99% – 29.99%3 | $10,000 - $35,000 | |
 | 5.99% – 18.99%4 | $5,000 - $50,000 | |
 | 15.49% – 34.49%5 | $2,000 - $25,000 | |
 | 6.95% – 35.89%6 | $1,000 - $40,000 | |
 | 6.99% – 18.24%7 | $5,000 - $75,000 | |
 | 9.95% – 35.99%8 | $2,000 - $35,000 | |