Unsecured Loan vs. Secured Loan

Unsecured loan or secured loan: which is better for you? You could fill a page with the pros and cons of each, but the question may be moot if you’re an apartment dweller or don’t own a car. Unless you have financial assets—certificates of deposits, a 401(k) or 403(b), stocks or bonds—you don’t have the collateral necessary for a secured loan.

But that isn’t necessarily bad news.  It’s a new piece of good news, but not owning your own home and taking out an unsecured loan is now an advantage if you lose your job. Just like apartment dwellers, mortgage holders have been laid off by the millions. And, those newly unemployed unfortunates who secured loans with their houses now are at risk of losing their homes if they can’t make their loan payments.

The same goes for any other assets put up as security for a loan. An unsecured loan provides a sort of financial security. If the time comes when you can’t make the payments, your assets can’t be repossessed; take out a car loan and the car is the security for the loan, and will be repossessed leaving you with nothing but the receipts for payments made.

That’s just one of the nuggets of conventional wisdom that’s fallen by the wayside during this recession. It’s a well-known fact that an unsecured loan has a higher interest rate than a secured loan, but the spike in credit card rates mitigates the disadvantage for those whose only option is an unsecured loan or credit card debt.

An unsecured loan almost always has a lower interest rate than the current ridiculously high interest rates on credit cards.