Secured debt is backed by collateral, or assets that you have in your possession. Mortgages, home equity lines of credit, home equity loans and auto loans are four examples of secured loans. Put simply, your lender will ask you what type of collateral you'll "offer up" to back the loan. It's a great incentive to encourage you to make your payments. Unsecured debt, on the other hand, is not backed by collateral. Examples of unsecured debt include personal loans, credit cards and student loans. As a borrower, collateral is an asset or property that you offer to your lender as security for a loan. A lender has a lien on this asset, which means they have the legal right to seize and sell your collateral to pay back the loan if you do not fulfill your obligations as a borrower (i.e., if you do not make your monthly payments). The lien stays in full force until you fully repay your loan.Collateral
A foreclosure stays on your credit report for 7 years from the date of your first missed mortgage payment that led to the foreclosure. Unfortunately, it can be detrimental to your credit.
Risk Level
A lender considers an unsecured loan riskier than a secured loan because they can only rely on a check of your credit score and the fact that you've agreed to repay your loan. As a result, to qualify for an unsecured loan, you often must have a higher credit score and often must accept a higher interest rate to qualify.
Your credit score is a three-digit number that proves how consistently you've paid back debt in the past and how well you currently handle debt. Credit scores range from 300 – 850. The higher your score, the more likely it is that a lender will want to work with you.
Your interest rate is the rate charged to you as a percentage of the principal, or original amount, of your loan.
Requirements
Unsecured loans typically have more stringent requirements for borrowers because of the risk to the lender. This means it's usually harder to qualify for an unsecured loan, but that also does depend on individual borrowers' qualifications. However, it's worth noting that if you're trying to rebuild your credit or have a lower credit score than you'd like, you may have an easier time getting a secured loan.
Loan Limits And Terms
Which loans – secured loans or unsecured loans – typically have higher loan limits and repayment terms?
First of all, let's discuss what "loan limits" means. The Federal Housing Finance Agency (FHFA) determines the "ceiling" for home loan limits each year. These are called the "conforming loan limits," and they are a dollar cap on what Fannie Mae and Freddie Mac will guarantee or buy. Fannie Mae and Freddie Mac purchase mortgages so lenders are free to do what they do best – lend mortgages to borrowers. The baseline conforming loan limit for 2023 is $726,200.
A secured loan will typically offer higher loan limits than an unsecured loan due to the nature of less risk and collateral offered up to the lender.
"Repayment terms" refers to how you pay back a loan in accordance with the loan's terms. Your repayment terms may be more flexible with an unsecured loan compared to a secured loan.
