When looking for lending options, it’s common to shop around to multiple lenders. You may find that multiple sources can provide you with funding, but the type of loans they offer may vary dramatically. This doesn’t just refer to the amount they offer, or the particular terms of the loan. Many lenders, such as banks and credit unions, specialize in unsecured loans. Others, like auto title loan lenders, offer what is known as secured loans. Knowing the differences and advantages of these types of loans can make a world of difference.
Secured loans, such as auto title loans, are quite literally “secured” by a source of collateral put up by the borrower. This collateral acts as assurance to the lender that a borrower has a second source of loan repayment, in case the borrower defaults on the loan. Collateral that is accepted for a secured loan may vary, depending on the lender or the amount of money the borrower is attempting to receive. For example, most auto title loan lenders use the physical title to a qualifying vehicle as collateral, not the vehicle itself.
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On the other end of the lending spectrum is unsecured loans. This type of loan typically does not use a collateral-based system. Instead, the borrower’s creditworthiness and history with the lender largely make up the qualifying criteria.
Which Type of Loan is Better?
Like most financial decisions, there is no one-size-fits-all option when it comes to the best type of loan. There are many factors to consider, and what is best for one person may not hold true for another.
Unsecured loans are considered to be a bigger risk for the lender. Since there is no property that is used for collateral, there are more restrictions placed on them. This can make unsecured loans harder and more costly to obtain. Unless the borrower has impeccable credit, they may be unable to qualify for an unsecured loan. And even if the borrower does manage to meet the requirements, interest rates can be set significantly higher than many types of secured loans.
Secured loans have the advantage of using a source of equity, such as a vehicle title with an auto title loan, as collateral. This reduces the amount of risk a lender has to incur. Imagine this scenario: Someone asks to borrow your phone for a few minutes. If they leave something of value with you, like a watch or an ID card, you are more likely to believe they will return than if they left nothing at all. Secured loans work on the same principle.
Using a source of collateral has more advantages than just putting the lender at ease. They typically have more relaxed credit requirements, which may make it easier for borrowers to qualify. They also often require far less paperwork and wait times when compared to unsecured loans. A reduced turnaround time makes secured loans an attractive option for borrowers who need expedited funding.
Ultimately, the type of loan that is best for you is the one that meets your needs. If you have perfect credit and no viable source of collateral, an unsecured loan could be worth exploring. If you need to borrow funds in a short amount of time, have collateral like a free-and-clear auto title, and worry that your credit will be a roadblock, secured loans like auto title loans may be the better option.
Now that you have a clear understanding of how these types of loans work, you can make a fully informed decision based on your needs and situation.