When you need a significant amount of money to fund a large expense, taking out a loan is often the go-to solution. However, with so many loan options available, it can be challenging to know which one is best for you. Two common types of loans are personal loans and secured loans. While both have their pros and cons, personal loans are often a better choice for borrowers. Here’s why.
What are Personal Loans and Secured Loans?
Before diving into the reasons why personal loans are better than secured loans, let’s first define what they are.
A personal loan is an unsecured loan that you can use for any purpose. With a personal loan, you borrow a set amount of money and agree to pay it back, along with interest, in fixed monthly payments over a specified term. Because personal loans are unsecured, you don’t need to put up any collateral, such as your car or home, to qualify.
A secured loan, on the other hand, requires you to put up collateral to qualify. The most common types of secured loans are car loans and home loans. With a secured loan, you borrow a set amount of money and agree to pay it back, along with interest, in fixed monthly payments over a specified term. If you fail to make your payments, the lender can repossess your collateral.
5 Reasons Why Personal Loans are Better than Secured Loans
Personal loans are a great option for borrowers who need quick access to funds and want flexibility with how they use the money. As with any loan, it’s essential to carefully consider your options and choose the one that best fits your financial needs and goals.
No Collateral Required
As mentioned, personal loans are unsecured, meaning you don’t need to put up any collateral to qualify. This is a significant advantage over secured loans, as it eliminates the risk of losing your collateral if you’re unable to make your payments.
Higher Loan Amounts
Because personal loans are unsecured, lenders may be more willing to lend you a higher amount compared to secured loans. The amount you can borrow with a personal loan typically ranges from $1,000 to $100,000, depending on your credit score, income, and other factors. In contrast, secured loans are typically limited to the value of the collateral you put up.
Flexible Repayment Terms
Personal loans offer more flexible repayment terms compared to secured loans. With a personal loan, you can choose a repayment term that works for your budget, typically ranging from one to seven years. This allows you to spread out your payments over a longer period, making them more manageable. In contrast, secured loans often have longer repayment terms, which can make your monthly payments higher.
Faster Approval and Funding
Because personal loans are unsecured, the application process is typically faster and more straightforward than secured loans. With a personal loan, you can often get approved within minutes and receive your funds within a few days. In contrast, secured loans require more paperwork and can take weeks to process.
More Flexibility with How You Use the Loan
Personal loans offer more flexibility with how you use the funds compared to secured loans. With a personal loan, you can use the money for any purpose, whether it’s to consolidate debt, pay for home renovations, or cover unexpected expenses. In contrast, secured loans are typically limited to the specific purpose of the loan, such as buying a car or a house.
Conclusion: While both personal loans and secured loans have their pros and cons, personal loans are often a better choice for borrowers. Personal loans offer more flexibility, higher loan amounts, lower interest rates, and faster approval and funding process, making them a popular choice for those who need quick access to funds.
Additionally, personal loans do not require collateral, which eliminates the risk of losing your property if you are unable to make your payments. So, if you need to borrow money and want to avoid the risk of putting up collateral, a personal loan may be the right choice for you.