Secured Loans Or Unsecured Loans? Which Is Best?
There are only a few cases where this discussion needs to be made by you. Most often the lender, based on your application, will let you know which product they are prepared to offer you, as well as the terms.
Sometimes there is no choice. Depending on the strength of the application, you may not meet the lender’s lending guidelines for an unsecured personal loan, but the lender will be happy to approve a secured loan.
Sometimes the choice will be limited to what the funds will be used for. In the case of borrowing money to fund a holiday for example, there is nothing a lender can use for security, so it will depend on the strength of your application as to whether an unsecured personal loan will be approved.
However, one of the questions on a loan application will be what assets do you have. If the lender knows you have a used car worth $15,000 for example, they may approve your holiday loan application on the condition they take the used car as security. This could make the difference between finance for your holiday or staying at home.
Criteria For Unsecured Personal Loans
The lending criteria for unsecured personal loans is more stringent than secured loans because they pose a greater risk to the lender in the event you default on the loan repayments.
This comparison chart will serve as a guide to let you know what lenders look for from applicants when applying for unsecured personal loans vs secured personal loans.
| Criteria | Unsecured Loan | Secured Loan |
|---|---|---|
| Capital | Applicants are generally asset backed, with equity in a home and savings in the bank. | Applicants are often renting with little savings history. |
| Capacity | Applicants income to expenditure ratio is high, meaning there is surplus to monthly living expenses. | Applicants income to expenditure is close to 1, meaning they live close to spending all of their pay each period. |
| Credit | Applicants have no defaults and history of paying credit on time. | Applicants can have minor credit infringements, i.e. late payments or small defaults, often to utility companies. |
| Collateral | Loan purpose is not for tangible goods. | Loan purpose is for goods such as cars, boats, motorcycles etc. |
| Character | Applicants are very stable with 1 address and 1 full time job in the last 5 years. | Applicants are often transient in residence with several part time or casual employments. |
Interest rates for unsecured personal loans tend to be higher than secured personal loans; all other criteria being equal because of the higher risk to the lender, and are often variable, meaning they can not only go down, but up as well.
Interest rates for secured personal loans tend to be fixed for the term of the loan, making budgeting each week easier.
When finance brokers from Houston Finance look at your application and then discuss the details with you, they can advise whether your application will most likely be secured or unsecured.