What’s the Difference Between Secured vs. Unsecured Loans?
In 2022, Canadian automakers sold around 1.5 million new and used vehicles. Car ownership is necessary for many people, but modern financial challenges often make car buying difficult or near impossible. So, many Canadian drivers use auto loans to make their purchases.
As more Canadians turn to financing to help buy or repair vehicles, they learn that car title loans aren’t so simple. Moreover, choosing the right type of loan will impact their buying experience. That’s why understanding the differences between secured vs. unsecured loans is necessary.
This article explores the critical distinction between unsecured loans vs secured loans. We also discuss tips to help you select the right loan for your needs. Read on to arm yourself with the knowledge you need to make an informed decision on your next auto purchase.
What is a Secured Loan?
To get a secured loan, you must offer something as collateral. Collateral is any asset that you pledge as security for a loan. If you default on a secured loan, the lender can seize the collateral to recover their losses.
You can offer many valuable items as collateral. Some common types of collateral include:
- Homes or real estate
- Cars, boats, or other vehicles
- Stocks and investment accounts
- Cash savings account
- Fine jewelry, art, and antiques
Most auto loans and car title loans are a type of secured loan. The lender has a lien on your vehicle until you pay it off. You will only receive the title back from the lender when it’s paid in full.
Collateral gives the lender an added layer of security when giving a loan. Since they can seize the asset if the borrower defaults, they would incur fewer losses.
Lenders prefer collateral that is easy to sell and has a stable market value. These items make it easier for them to recover their losses if the borrower defaults on the loan.
How Does Collateral Impact Secured Loans?
The security of a secured loan translates to higher confidence levels from the lender. This means that secured loans often have lower interest rates than unsecured ones.
Collateral offers extra protection for the lender, allowing them to take over the specified asset if the borrower cannot meet their loan repayment responsibilities. When a borrower has collateral, obtaining a secured loan is often considered beneficial. However, borrowers should carefully weigh the potential outcome of relinquishing the specified asset if they cannot repay the loan. For individuals with less predictable financial situations, choosing unsecured loans may be a more appropriate solution, even when collateral is available.
Also, you should consider the associated fees of secured loans. Since you have collateral, the lender may have you pay appraisal fees and insurance premiums on the item. These costs may increase your total loan amount, but not by too much.
Estimating the Value of Collateral
Estimating the value of your collateral is a crucial aspect of getting a secured loan. Often, the value of the collateral must be equal to or greater than the amount you wish to borrow.
Also, despite your estimations, your title loan lender will still appraise the item to determine its value. The value they choose isn’t often open for negotiations. So, even if you think the item is more valuable, you may need to compensate with cash or more collateral.
You can estimate the value of an item by researching its current market value. As you make these estimations, take into account factors about your item like:
- Rarity (for collectibles)
- Special features
If you’re using a car as collateral, you can look up the current market value of similar cars in your area to understand its worth. You can also consider getting an appraisal from a professional to ensure your estimate is accurate.
What is an Unsecured Loan?
An unsecured loan is a type of loan that is not backed by collateral. Unlike secured loans, lenders grant unsecured loans based only on the borrower’s creditworthiness.
Evaluating creditworthiness is more than checking your credit score. The lender decides whether to give you a loan based on factors like:
- Credit repayment history
- Employment status
- Debt-to-income ratio
Because unsecured loans are not secured by collateral, lenders consider them riskier. To offset this risk, they often charge higher interest rates and fees on unsecured loans vs secured loans.
The interest rates on unsecured loans vary depending on the lender, your creditworthiness, and other factors. But it’s often proportional and offsets your risk of losing something valuable as collateral.
Defaulting on an Unsecured Loan
One advantage of unsecured loans is that you do not have to put up any collateral. That means you do not risk losing any assets if you cannot repay the loan. However, this also means that the lender has fewer options for recovering their losses if you default on the loan.
Defaulting on an unsecured loan may lead the lender to take legal action and collect the debt. This can result in wage garnishment, seizure of assets, or other legal actions that can impact your financial well-being.
While this happens sometimes, it’s rare and will never happen if you make on-time payments or communicate well with your lender. It’s important to feel confident in your repayment abilities when taking out unsecured loans vs secured loans.
How to Choose Secured vs. Unsecured Loans
Choosing between a secured and unsecured loan depends on your financial situation and needs. If you have collateral to offer and want a lower interest rate, a secured loan may be your right choice.
However, an unsecured loan may be a better option if you don’t have collateral or don’t want to risk losing it. Consider your ability to repay the loan and your credit score when deciding between secured vs. unsecured loans.
Secured Loan vs Unsecured Loan: Get Yours Today
Understanding the difference between secured vs. unsecured loans is crucial when applying for a loan. These distinctions help ensure your ability to repay and your options if you default. But you don’t have to decide on loan types alone.
Fast Action Finance, a leading auto loan company in Toronto, Canada, can help you choose the right loan for your needs. We can provide fast and easy approval with competitive rates if you need a car title loan.
Apply for a car title loan from Fast Action Finance today and get the money you need with fast and easy approval.