What is the difference between a secured and unsecured loan?

Taking out a loan can be a good option when it comes to realizing a dream or even dealing with an emergency, but there are different types, so let's clarify the difference between a secured and unsecured loan.

This way, you will understand how each one works, the advantages, disadvantages, and requirements of the financial institutions, so you can analyze and choose which option will suit you best.

So keep reading and find out the difference between secured and unsecured loans!

What is a secured loan?

A secured loan is one of the easiest types of loans to obtain approval.

Because in this loan option, you offer assets or financial resources as collateral for payment.

In theory, the financial institution feels more secure in releasing the amount you requested, since there is a guarantee in case you are unable to honor the commitment.

Consequently, this type of loan offers lower rates, a longer repayment period, among other advantages.

How does a secured loan work?

As the name suggests, in this modality you need to offer an asset as a guarantee of payment to the financial institution.

This way, the bank will have indirect possession of your property, which means it will have all rights over it, except the right to use it while you are paying off the loan.

As the loan applicant, you have direct possession of the property, which means you can use it, but you will only become the owner again after paying off all installments of your secured loan.

However, if the contract is not fulfilled and the installments are not paid, you run the risk of losing your property permanently.

But this repossession of the asset, as it is called, only happens when you fail to pay at least three installments of your secured loan.

However, the bank will usually contact you before taking any steps to try to renegotiate your secured loan debt.

What guarantees are accepted for the loan?

There are several types of secured loans, which can make it easier when you apply for credit.

Since not everyone has high-value assets, they prefer this option when applying for a loan.

Therefore, currently, secured loan options accept vehicles or properties (which are the most common guarantees), cell phones, investments and payroll loans.

But to help you better understand how secured loans work, let's talk a little about each of the options.

Loan secured by vehicle

In this modality you can use your car or motorcycle as vehicle collateral.

The vehicle is evaluated through an inspection and consequently, the newer and better preserved it is, the more valuable your loan will be and the lower the interest will be.

Therefore, the amount you can request will be determined through an assessment based on the market value of the car.

But be aware that the amount that will be granted can vary between 50% and 90% of the vehicle's price, so do not count on the total value of your asset as a secured loan.

Another important point you need to know is that the vehicle must be paid off and registered in the name of the person requesting the loan.

Furthermore, in this modality it is important that your Score is high and proof of income is required.

However, it is worth noting that in the secured loan option there are more chances of approval if you have restrictions in your name, since the bank has a guarantee of repayment.

Loan secured by property

This modality offers the best interest rates on the market and accepts your property as collateral for payment of the requested credit.

Although criteria vary depending on the financial institution, they generally accept residential, commercial, used, and new properties as collateral.

And unlike a vehicle-secured loan, your property may be paid off or even financed.

However, it is important that you know that when choosing a financed property, it is important that the property has at least 50% paid off.

Loan secured by cell phone

In this modality you will have access to lower values, compared to the previous ones.

Since the cell phone used as loan collateral has low added value.

As with the others, it is necessary to evaluate and confirm the requirements with the financial institution.

Loan with investment guarantee

In this option, the line of credit is a possibility for people who have investments in a bank.

This way, you can get a loan with lower rates without the need for decapitalization.

Therefore, your investments continue to yield while you are paying your loan installments.

It is interesting to note that some financial institutions even offer a grace period before starting payment.

Payroll loan

Although this type of loan does not actually require collateral, such as property or a car, for example, the collateral is in the installment discount.

Because a payroll loan is a good option for workers, retirees, public servants, and INSS pensioners.

Therefore, the installment discount is made directly from the payroll.

So now that you know some of the main types of secured loans, let's talk about unsecured loans.

What is an unsecured loan?

You can think of unsecured lending as completely opposite to secured lending.

As the name itself says, the institution has no guarantee of payment of the amount released.

Therefore, it offers higher interest rates as this is in a way a way to compensate for financing with greater risk.

Therefore, an unsecured loan is an option for those who do not have any of the assets mentioned above as payment guarantee.

But be aware that an unsecured loan does not mean a loan without consultation, quite the opposite.

How does an unsecured loan work?

In this modality, financial institutions do not offer any payment guarantee, so the only way to know if you are a good payer is by checking your financial history.

It is through this consultation that the bank will decide whether to lend you the money or not.

What unsecured loan can you apply for?

Loans that are not secured by an asset, whether real estate, a car, a loan, among others, are considered unsecured loans.

And the most common in these cases is a personal loan or a credit card loan.

However, to apply for an unsecured loan using a credit card, it's important that you research and clarify all your doubts with the card issuer first.

This type of unsecured loan can end up being a little more expensive.

Therefore, be sure to research, evaluate, and simulate your installments before signing an unsecured loan agreement.

One of the advantages of an unsecured personal loan is its convenience, especially if you are already a bank customer.

Customers usually already have a pre-approved limit for this type of credit, and it only takes one click to apply.

However, this convenience can come with a high price in the form of interest.

So, as we've already mentioned, be sure to clear up any doubts you may have before taking out an unsecured loan.

Difference in secured and unsecured loan interest rates

Although approximate, rates may vary slightly depending on the bank and the type of loan you wish to apply for.

That's why our main tip is: Research!

But during your research there are some important points you need to evaluate.

Secured loans offer lower rates, as the bank has the guarantee that your debt will be paid off.

This offers you more installment options and reduced interest rates.

With an unsecured loan, your financial history will make all the difference, as it will show the bank whether you are a good payer.

However, the fact that there is no guarantee of debt repayment makes the rates higher and, depending on your history, it may make it somewhat more difficult to obtain an unsecured loan.

However, unsecured loans still offer other possibilities, such as loans via credit cards or overdrafts.

But these last two options are the ones with the highest interest rates.

How much loan can you apply for?

Secured loan amounts will vary depending on the asset offered as collateral and range from 50% to 90% of the value assessed by the bank during the inspection.

In the case of an unsecured loan, the financial institution defines the amount based on the inquiry and your financial history.

Something important to note is that economists suggest that the ideal amount requested for loans should be 30% or less of your monthly income, as the possibility of honoring the installment commitment is greater.

However, remember that this is not a rule; all possibilities may change depending on the financial institution you choose and your relationship with the bank.

Conclusion

Basically, the difference between secured and unsecured loan options lies in the installment options and interest rates.

So if you have the possibility to choose between the two, try to research and evaluate which one will best suit you.

And if you don't have any assets to secure a loan, evaluate all unsecured loan options and only sign the contract if you're sure the installments will fit your budget.

And now that you've discovered the difference between secured and unsecured loans and decided to apply for yours, read our text about it. how credit analysis is done!