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Should You Choose a Secured or Unsecured Loan?

By: American Heritage08.15.19

Life takes money. And sometimes, it takes a lot of money at once. Whether you are planning a wedding, updating your kitchen, or fixing your car, having affordable access to cash is often essential. After all, you don’t want to wipe out your savings.

When it’s time to look for a loan or line of credit, one of the first questions to ask is: secured or unsecured?



Loans fall into two basic categories: secured and unsecured. Secured loans are guaranteed by something of value, such as a house for mortgages or a car for auto loans. The lender can keep this property as payment if the borrower defaults on the loan. Secured loans come with less financial risk, so lenders typically offer lower secured loan rates.

Unsecured loans, such as most credit cards and student loans, are not backed by any assets like a car or house. Because it’s harder for lenders to recover unpaid balances on an unsecured loan, they will usually charge a higher interest rate.   

For either type of loan, your lender wants to be sure that you will pay back the money you borrow (plus interest) on time. They will check your credit history to determine if you are a good or bad credit risk.



The main difference between secured and unsecured financing may be simple, but there are many types of financing in each category. Asking these questions will help you choose the best option for your situation:


Am I Comfortable Tying Up Collateral?

When a loan is secured by something of value, such as your home or your savings, the lender has a legal interest in this property (a lien). You can’t suddenly sell your home or tap your savings without first settling your obligation to the lender.

On the other hand, if you plan to stay in your home or keep your savings in your account, using collateral can be a smart move.  


How Much Will I Borrow?

Secured loans typically have higher borrowing limits, making them the better choice when you need to finance a large home project or big-ticket purchase. 


How Much Will It Cost?

Interest charges vary depending on the loan type, how much you borrow, whether you use collateral, and other factors. Along with interest, some loans or lines come with an origination fee, annual fee, or other charges. Be sure to look at the APR, not just the rate, to judge the cost of each financing option.


Do I Need to Borrow More Than Once?

If you want to pay for multiple expenses over time, consider a line of credit instead of a traditional term loan.  



While credit cards are one of the most popular types of unsecured financing, the options below can often provide a lower rate, more purchasing power, and better repayment options.  


Personal Loan

If you are planning a wedding or vacation, or need to cover an emergency car repair or vet bill, an unsecured personal loan could be a great option. With low monthly payments and terms that can last several years, this is ideal when you want to borrow a relatively small amount for a single purpose.


Personal Line of Credit

An unsecured line of credit gives you the flexibility to access funds as needed, up to your approved credit limit. This is a great option if you need to pay for a series of smaller home repairs or other expenses.

Because this is an open-ended credit line, you can borrow money as needed as long as you continue to make payments. Many people link their credit line to their checking account for an affordable form of overdraft protection. Look for a lender that does not charge an annual fee.



Thanks to their collateral requirement, these loans and lines of credit are some of the most affordable financing options, especially when you need to borrow a larger amount.


Home Equity Loan

This popular option is backed by the equity in your home, which is the value of your home minus your unpaid mortgage balance. This low-rate loan can help homeowners access tens or even hundreds of thousands of dollars in financing, all in one lump sum. It’s a great option when building an addition or completing a major home renovation.

While both home equity loans and lines of credit tend to come with more upfront fees, their secured loan rates are far lower than those of unsecured loans.


Home Equity Line of Credit (HELOC)

A HELOC makes it easy to cover multiple expenses over time. Many people use it to fund a series of home improvements, pay off credit card debt, or pay for education expenses. As with other credit lines, you only pay interest on what you borrow, and you can continue to draw money (up to your approved limit) as long as you are paying down your balance.

As a HELOC borrower, you will need to plan for two different phases: the draw period (the first three to five years, during which you can borrow funds) and the repayment period (during which you must repay the full balance). Here at American Heritage, our members can choose from a variety of HELOC options, including our Interest-Only HELOC (for lower payments during the draw period) and even a unique fixed-rate option.


Share Loan

Even if you rent or are still building equity in your home, you can still choose an affordable secured loan. With a Share Loan from your local credit union, you can save money on interest by using your savings as collateral. Along with low secured-loan rates, this loan lets you earn competitive dividends on your collateral to offset your finance costs even more.



Whether you want to travel the world, update your home, or stay ready for new expenses, choosing the right lender is just as important as finding the right loan.

At American Heritage, we support financing needs large and small with a full range of Personal Loan and Home Equity options, along with low rates and fewer fees. Our friendly team is always happy to discuss your needs and help you choose the option that’s right for you.



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