Secured and unsecured loans are both personal loan types available to borrowers. Loans secured by cash can help borrowers increase their chances of approval, but unsecured loans may be better for freeing up cash. The article below explores the advantages and disadvantages of cash-secured loans and unsecured loans in order to assist borrowers in finding the best loan type for their financial situation and individual goals.

What is a Cash Secured Loan?

A cash-secured loan is a type of loan secured by collateral, i.e., cash. When you take out a cash-secured loan, you borrow against the money you put down or that’s already in the bank—potentially in a savings account or certificate of deposit (CD). Cash-secured loans are a type of credit-building loan that’s considered low-risk by most lenders.

Since borrowers put one or more assets on the line, lenders tend to offer them better interest rates and terms. Cash-secured loans are ideal for those with no credit history or a low credit score. If you’ve had trouble qualifying for other types of loans or want to build your credit, a cash-secured loan can fulfill those needs.

How does a Cash-Secured Loan work?

A cash-secured loan allows you to borrow money from the bank where your funds are stored, whether in a savings account or CD. You can still earn interest on your savings, though it’s likely not enough to offset the interest incurred due to the cash-secured loan. However, you can use the funds you borrow for whatever purpose you like, from buying a new car to going on vacation or paying for a wedding.

Cash secured loan funds often come in the form of a lump sum or a line of credit you access with a cash-secured credit card. Interest rates on these types of loans are typically fixed. However, cash-secured lines of credit come with variable interest rates.

You may be able to borrow the full amount of what you pledge to the cash-secured loan, but the lender can also limit how much you borrow—often expressed as a percentage. If you default on a cash-secured loan, the lender has the right to seize the corresponding amount of cash to pay off the remaining debt. In this sense, cash-secured loans are similar to any secured loan, where the collateral is forfeit per the loan terms should the borrower default.

Cash-Secured Loans: Pros and cons

Because of looser qualification criteria, cash-secured loans result in a simpler application process than you’ll find with many other loan types. For example, most lenders only require proof of identification and information regarding your collateral. Most applications are reviewed and considered within a few days.

Pros

• Simpler application process
• Faster approval and loan funding
• Increased chances of approval
• Lower interest rates
• Higher borrowing limits
• No minimum credit score required
• Can improve your credit if you make on-time payments
• Extended terms with potentially lower monthly payments
• Timely payments contribute to building and improving credit
• Fixed interest rates make it easier to budget for loan repayment

Cons

• Risk of losing asset
• Applying for this loan requires a hard credit pull
• Doesn’t favor those without assets
• Failure to repay the loan can result in credit damage
• Potential for late fees

What is an Unsecured Loan?

Unsecured loans are more common than secured loans because they require less from borrowers at the outset. For instance, lenders don’t require collateral from borrowers who apply for an unsecured loan. However, lenders consider unsecured loans riskier due to the lack of collateral, which often translates to stricter terms regarding the borrower’s creditworthiness, financial standing, and debt-to-income (DTI) ratio.

How does an Unsecured Loan work?

Qualifying for an unsecured loan requires a high credit score, a low DTI ratio, and a higher income. However, the loan is typically disbursed in a lump sum. Many lenders require employment verification before funding unsecured loans, which can delay the approval process.

Unsecured loans typically feature a fixed interest rate established upon loan origination. Depending on the lender you choose, you don’t have to report how you use the loan funds. However, lenders may charge a loan origination fee, which can be up to 10% of the loan amount.

Unsecured Loans: Pros and cons

Although borrowers aren’t required to put up collateral with an unsecured loan, the application requirements can often be that much stricter. However, unsecured loan repayments can help boost your credit score. Explore the advantages and disadvantages of unsecured loans below.

Pros

• No collateral required
• Flexible funding use
• Available for smaller, more manageable amounts
• Fixed interest rates for more predictable monthly payments
• Can help improve credit score

Cons

• Stricter application requirements
• Employment verification can delay the process
• Only the most qualified applicants benefit from a lower interest rate and better terms
• Damage to credit if you default on the loan
• Higher bank fees
• Lower borrowing limits
• Generally have higher interest rates

What to consider when choosing between Cash-Secured and Unsecured Loans.

Debating the advantages and disadvantages of cash-secured and unsecured loans as concepts is one thing. However, selecting between the specific loans offered at various institutions can prove challenging. Ask yourself the following questions as you compare cash-secured and unsecured loans.

Credit Score

Is your credit score high enough to get a better interest rate via an unsecured loan, or would you benefit from putting up collateral to obtain better terms?

Income

How much can you realistically pay back in a reasonable amount of time?

Borrowing Limits

How much do you need/want to borrow, and do lenders offer that amount for (1) the type of loan you’re pursuing and (2) your financial qualifications?

Interest Rates

Which loan type increases your chances of obtaining a lower interest rate?

Fees

What explicit and hidden fees apply, given your chosen loan type?

When choosing between a cash-secured and unsecured loan, determine what you want to use the loan for, how much you’ll need, and how you plan to pay it back. Comparison shop to find the best loan terms based on your financial standing. Start small and work up to larger amounts as you continue to pay back small loans.

Find the loan that best fits your financial goals.

Cash-secured and unsecured loans can help you achieve your financial goals. Selecting the best loan type can help you succeed in paying your debt back on time. Find your nearest branch to speak with a representative about our cash-secured and unsecured loans.