Secured vs. Unsecured Personal Loans

by Johns Hopkins FCU
5/6/22

A personal (or Anything) loan can be an excellent way to secure additional funds in emergencies or to address unexpected expenses. Personal loans can also help with the cost of weddings, dream vacations, and home improvement projects. And the list doesn’t stop there!

It’s important to know that there are different types of personal loans. You will want to compare secured vs. unsecured personal loans to decide which is the right fit for you. These loans vary when it comes to interest rates, loan terms, and even loan limits.

At Johns Hopkins Federal Credit Union, we know you sometimes need a little extra. Keep reading to learn whether you need a secured or unsecured personal loan.

Getting Ready to Borrow

First things first, what do you need to do to get ready to take out a personal loan whether secured or unsecured?

Credit Score and History

This is one of the most important factors a lender will consider when reviewing loan applicants. Your credit score and history will have a direct impact on the interest rate you receive if approved for the loan. Some lenders require a minimum credit score. As a credit union, JHFCU makes it easier for you to get approved even with a lower score or no credit history.

Before applying for a loan, be sure to review your free credit reports. If there is an issue, you can get it corrected before applying for a loan or even take a little extra time to get your score higher so you can get access to better rates.

Income

Any lender will take a look at your income to make sure you have the funds to repay the loan. You can provide evidence of income with recent tax returns, monthly bank statements, or pay stubs. If you are self-employed, you can show tax returns or bank deposits.

A lender may also look at your debt-to-income ratio (DTI). Your DTI is expressed as a percentage determined by dividing your monthly debt by your pretax income.

Comparing Secured vs. Unsecured Personal Loans

While there are similarities when comparing secured vs. unsecured loans, looking at the differences will help you determine which loan is right for you.

Interest Rate

The interest rate is the amount a lender charges a borrower and is a percentage of the principal or the original loan amount. The annual percentage rate (APR) is the interest rate plus any fees associated with the loan.

Unsecured loans have a higher interest rate since they’re not linked to any collateral. Secured loans tend to have lower interest rates because you provide collateral to ensure you will pay off the debt.

In addition, the value of the collateral you provide to secure your loan can affect your interest rate. For example, if you’re using a vehicle or home to secure a loan, the value of the vehicle or home is a factor in determining whether you qualify and at what rate.

Loan Terms

A loan term is the amount of time you have to repay the loan. Secured personal loans are usually repaid in fixed, monthly payments over a few years. Unsecured personal loan terms are similar but may be longer in some cases.

Make sure you check to determine if there is a prepayment penalty if you pay off your loan early. JHFCU believes you should be able to pay off the loan at your convenience so we don’t charge a prepayment penalty.

Loan Amounts

You can usually get a higher loan amount with a secured loan since, again, you are putting down collateral. AT JHFCU, we can work with you to get the loan amount you need.