There are many people I work with who are confused by the terms ‘secured’ vs ‘unsecured’ when it comes to loans. As such, I want to go over these definitions as to how they apply to those looking to take out a 3000 secured loan (yes, get a cup of coffee unless you are a financial dork like me – and I promise that I will try to make this as quick and painless as possible. Yes, understanding this can help you a great deal, so let’s see if we can get through this in a few minutes).
What is the difference between 3000 Secured Loans and Unsecured Loans?
First, let’s look at the definitions of both ‘secured’ and ‘unsecured’:
- Secured Loan – a loan that is back by capital pledged to support a loan in case of payee default. This jargon essentially means this: you have to sign over your rights to an asset (home, car, stocks, or anything that has value and can be sold easily) to the lender. If you can’t pay your loan back then they will assume ownership of what used to be your asset, sell it, and try to get as much money so they can pay off your loan. Yes, this doesn’t sound good if you are the person pledging the asset, but it’s actually very common in the loan world, and you have no issues as long as you pay the loan back in time.
- Unsecured Loan – a loan that is not pledged or backed by any asset other than the credit of the borrower. What this mumbo jumbo means is that the bank is lending you money based solely on your credit history and worthiness. Sounds great, right? Yup, but remember one thing – because it’s better for you, it’s worse for the bank. As such, you can expect to pay a higher interest rate on the loan (yes, that is bad).
As you can see, there are tradeoffs between a secured loan for 3000 and one which is not secured. Mainly, the advantages of the secured loan are:
- Lower borrowing costs / interest rates
- Easier to get the loan approved
- More borrowing options
The Disadvantages of a $3000 Secured Loan:
- You lose your asset if you don’t pay the loan back
- The bank takes your asset if you default
Yes, these two things are the exact same but it’s important that you understand that main point and proceed accordingly (i.e. make sure you pay back the loan, as the asset they will require to be pledged will always be worth more than the $3K borrowed).