Loans
October 1, 2015

Secured Loans Versus Unsecured Loans

Simple. Thrifty. Living.

Credit card offers are unending; gas, bank and reward cards entice you. Perhaps you have student loans or hold balances on credit cards. Maybe you have debt and want a loan to pay it down but don’t know what the terms mean. Below are some simple definitions for common lending terms.

Student loans and credit cards fall under unsecured debt. Other types of unsecured debt include:

  • Attorney fees
  • Club memberships
  • Medical bills
  • Personal lines of credit
  • Rent

These obligations don’t require you to risk anything because you don’t need to give the other party collateral when you borrow from them. This means that risk for the loan amount is on the lender, so you pay more for the privilege of using the lender’s money. After all, if you try to walk away from your debts, what can the lender take from you? There is no collateral on the line. Most of the best online loans are unsecured loans. Check out a site like Opploans, which makes it easier to get approved.

Secured loans come with lower interest rates than unsecured loans. You agree to give up something valuable to you (such as your vehicle or your house) if you stop paying your debt, so you take a greater risk. Other secured loans include:

  • Furniture you buy on an installment plan
  • Loans with a pawn shop or a bank using household goods as collateral
  • Second mortgages or home equity lines of credit (HELOCs)

Swapping unsecured loans for secured debt does little to help you when it comes to reducing debt. Getting a second mortgage to pay off your credit cards is risky because if an emergency were to arise, you could lose your home if you used it as collateral.

However, you may see lower interest rates if you swap an unsecured loan for secured debt. Bankrate.com recently pegged credit card rates at around 15 percent and second mortgage rates at around 4 percent. Both of these interest rates are lower than credit card interest rates. You can also get a tax break from mortgage interest deductibility, but the lower rate and the tax break are “bought” by putting your house or vehicle on the line.

If your credit history gives you access to balance transfer deals, transfer unsecured debts to a single new card. Some balance transfer cards give you low rates (down to 0 percent) for up to 15 months. Fees are generally attached for transferring your balance, so plan carefully. Pay more than each month’s minimum and close the account immediately after you pay it off.

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