When you’re looking for a loan, there are plenty of categories to consider. Fixed rate versus variable rate. Open-ended versus close-ended. Secured versus unsecured credit. How do you know what’s right for you? And how do you know the difference between them?
Today we’ll take a look at the difference between secured and unsecured credit. The major differences between the two include the risk the bank assigns to the loan, the interest rates that come with each type and your credit worthiness. Take a look at each type of credit and consider the impacts each may have on the type of loan you’re looking for.
Having secured credit means that there’s some type of collateral securing the debt, such as a house, car, certificate of deposit (CD), etc. When credit is secured, there is less risk for the bank to lend to you because there is something to fall back on if you stop making your payments. Secured credit is usually easier to obtain and uses fixed interest rates, which means the interest rate stays the same as the rate you closed your loan at. Mortgages and home equity loans fall under this category.
With unsecured credit, there is no collateral backing up the amount of money the bank lends to you. Because of this, your credit score plays a bigger role and interest rates are often adjusted to the risk. You’re more likely to see variable interest rates with unsecured credit as well, meaning the interest rate charged may vary with changes in market interest rates. Unsecured credit is commonly used with credit cards, checking reserves and unsecured notes.
Choosing between secured and unsecured credit depends mostly on your situation. It can also depend on what’s happening in the market. For example, if interest rates are rapidly going up, then you may prefer to have a fixed interest rate and secured credit, because you know exactly how much interest will be charged. As always, it’s best to meet with a banker to discuss your options and needs.