Running low on money can make one feel helpless and insecure. And procuring quick cash—whether to address an emergency situation, consolidate credit card debt into a lower interest rate, make home repairs, or something else—is not always easy. One option that comes to mind is a personal loan.
In general, loans come in two broad types: secured and unsecured. Here are succinct definitions of each of the two types:
Secured loan: This loan is backed by “collateral,” which is an asset, such as a house or car.
Unsecured loan: This loan is not backed by collateral, which means that you don’t need to present an asset to qualify for financing. Most personal loans are unsecured.
Ultimately, of course, it’s up to you to choose the loan that best fits your specific needs and financial situation. That takes research—but to help get you started, we’ll provide an overview of both secured and unsecured personal loans.
Requiring collateral for a personal loan is uncommon, but not unheard of. Generally, secured loans have more competitive interest rates, larger loan amounts, and more favorable terms.
Collateral can include a house, car, boat, and so forth, whatever a lender is willing to hold as collateral. You may also be able to use investment accounts, cash accounts, or CDs as collateral to get the cash you need. Some general examples of collateral include:
• Your home: Real estate can be the biggest source of equity for many people. So even if you have a mortgage on a property, there still may be equity available to tap. If so, you could take out a home equity loan , which is basically a second mortgage. With this type of loan as collateral, you typically get a lump sum from the lender to spend as needed. You could also consider a home equity line of credit (HELOC). In this case, your lender approves you to use a certain dollar amount based on the equity you have in your home, but you don’t get a lump sum payment. Instead, you can use the money, as needed, within the approved parameters , perhaps through the use of a special checkbook or debit card. You only pay interest on the money you’ve withdrawn from the available loan amount. There are downsides to either of these choices, including a possible variable rate (which can rise and fall in accordance with market fluctuations) and that, if you don’t make payments, the lender can seize your home.
• Your vehicle: A vehicle can be used as collateral when buying a car or truck, but some lenders allow you to use the equity in the car, truck, or other vehicle to get funds. This may be a better choice than, say, a payday loan—but you risk losing that vehicle if you can’t make the payments.
• Investment accounts: You might be able to use a certificate of deposit (CD) or other investment account as collateral. However, using these accounts as collateral might prevent you from accessing the funds in the accounts, which is a downside to consider.
Finder.com goes even further in depth, listing numerous other items that could be used as collateral for a secured personal loan, including paychecks, savings accounts, paper investments, fine art, jewelry, collectibles, and more.
For fun, Fundera.com lists some of the most unusual items ever used as collateral for loans throughout history, including wheels of Parmigiano Reggiano cheese, designer handbags, rubber, thoroughbred horses, winning lottery tickets, wine—and even soccer players themselves. (To be clear, while we have serious respect for anyone using a wheel of cheese as collateral, these examples are fanciful and hilarious but not examples of collateral the average consumer might use.)
Generally, if a borrower fails to repay their secured loan, they will receive a notice or call letting them that he or she is in default (giving the borrower an opportunity to become current on payments); by their very nature, secured personal loans can lead to loss of the collateral asset if there is a failure to repay.
Potential Plusses of Secured Loans
If you need to borrow a larger sum of cash, then you might find more success if you put up collateral. You might also receive more favorable rates and/or terms, because the lender has the security of knowing that collateral can be possessed (often called “repossessed”) if the loan is not paid back. Plus, a lender might approve a secured personal loan for a borrower whose credit score isn’t as high as one that might be required for a riskier, unsecured personal loan.
Different lenders offer different types of secured loans and have different underwriting criteria. So, to discover what a specific lender requires for a secured loan, you could just ask them, “What can I use as collateral for a personal loan?”
Unsecured Personal Loans
Because these types of loans aren’t backed by collateral and just need your written signature promising you’ll pay back funds (as well as a review of your credit history and other financial fitness indicators, of course), you may hear unsecured personal loans called “signature loans .” You might also hear the term “good faith loan” or “character loan.”
In general, an unsecured personal loan is an installment loan where you pay back the amount borrowed at a certain interest rate over a predetermined term, perhaps between three and seven years.
Student loans are a type of unsecured loan, though they have their own unique terms and repayment options. So are most credit cards, though rates can be higher than what’s typically considered on an unsecured personal loan.
Potential Plusses of Unsecured Loans
Unsecured personal loans typically can be obtained on short notice and, if the borrower has sufficient income, a good credit score and history (among other factors), rates can be competitive compared to secured loans. In a sense, these loans are backed by the borrower’s creditworthiness.
These loans can be easier to find than in the past, thanks to online lenders (such as SoFi) offering them. Rates are typically fixed on unsecured personal loans, and funds can be used for numerous purposes, including:
• consolidation of credit card debt
• debt consolidation, which can include credit card balances (or not)
• medical expenses
• home renovation or repair projects
• career training
And, of course, with an unsecured personal loan, you wouldn’t be tying up any asset or putting them at any risk.
Cons of Unsecured Loans
Because unsecured loans are riskier for the lender, rates are typically higher than secured loans, while the amounts available to borrow are usually smaller. And, while it’s true that, with unsecured loans, there isn’t an asset that can be repossessed for nonpayment, lenders can send the account to debt collectors or take the borrower to court for nonpayment. This can significantly affect a person’s credit score, damage that can last for years.
Building or Repairing Credit
If your credit score or credit history is preventing you from getting an unsecured loan, it might make sense to build or repair your credit. This won’t happen instantly, so it won’t be the magic solution if you need a loan now. But it could be a smart move for today and for your financial future.
Making a Choice: Secured or Unsecured
What’s best for you depends upon your specific need, your financial situation, your credit history, and so forth.
What people typically want is the ease of an unsecured personal loan with the lower interest rates and higher borrowing limits of a secured loan. If that sounds like you, then we invite you to explore what’s available at SoFi for qualified borrowers.
Unsecured Personal Loan at SoFi
At SoFi, personal loans are made easy, with low rates and no fees. No origination fees, no pre-payment fees, no late fees. And, if you sign up for autopay, you could save even more.
Plus, at SoFi, unsecured personal loans are available up to $100,000. You could use funds for credit card consolidation, home improvements, relocation assistance, unexpected medical expenses, major personal purchases, and more.
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