Is a Short Term Unsecured Loan Better than a Short Term Secured Loan?

Using a short term unsecured loan is a popular method to getting cash quickly during an emergency. While many people use this type of loan, they often overlook the secured loan option. While both forms of lending have their advantages, you may be better served by one over the other. Here are the basics of each type of loan and some facts to help you make the right decision.

Interest Rates

One key area where these two loans differ is in the interest rates that are offered. With an unsecured loan, you are always going to have a higher interest rate than with a secured one. From the lender's perspective, an unsecured loan represents a much greater risk than one that involves some collateral. If you were to default on the loan, the lender could always come and repossess the asset with a secured loan. This would allow them to sell the asset and get a good portion of their investment back. With an unsecured loan, there is no such protection. They would have to take you to court and let the judge decide how much money they get. Then if you do not have any money, they may never see their investment again. With this greater risk, the banks have to charge you a higher rate of interest along with it. 

Floating vs. Fixed Rates

Another way that unsecured and secured loans can differ is the type of interest rate that is offered. With short term secured loans, you will typically be offered a fixed interest rate. Having a fixed rate can give you the consistency that you need on a month-to-month basis. Your payment will be the same every single month, regardless of what the market interest rate does. 

With an unsecured loan, they will often require you to sign up for a floating interest rate, or adjustable rate. This will provide you with a certain level of uncertainty with your loan payment. The interest rate on the loan will be tied to an index that will fluctuate in the market. If the index goes up, so does the interest rate on your loan. With the uncertainty in the market, your payment could double during the life of the loan. 

Collateral

One area where the unsecured loan is better is that you do not have to provide any form of collateral for it. With a secured loan, you have to tie something to the loan in order to get it. Therefore, you might have to give them the title to your car or some other piece of property. If you do not pay the loan, they will repossess the property and get their money back. 

The Verdict

In most cases, you will be better off financially by going with a secured loan. This will provide you with a lower interest rate and most likely a fixed one as well. If you do not have any collateral to utilize, then you would be better off with the unsecured loan. However, most of the time, it will help you to go with a secured loan.

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