Secured vs unsecured line of credit: What’s the difference? If you’re looking to take out a loan, you may be stumbling upon all kinds of new terms you haven’t yet heard of. For example, what are the differences between unsecured or secured credit lines?
Well, just in Canada, there is now over $100 billion dollars of credit card debt across the country for the first time ever, so get ahead of everyone else by knowing the different types of credits and which is right for you.
Let’s talk about getting a secured line or an unsecured line of credit and the risks that come with them!
What Is An Unsecured Line Of Credit?
An unsecured line of credit is the form you’re probably most familiar with, as it is the most popular. If you have a credit card, chances are that it’s unsecured.
There are also the very risky “payday loans“, known for being extremely short-term, high-interest loans designed to be paid back on the day of your upcoming paycheck.
All unsecured lines of credit are typically designed to be short-term loans that are riskier for lenders, so they come with their pros and cons.
The advantages of this type of credit come with some demands on your end. Unsecured lines need to be paid off regularly to avoid owing huge amounts of interest.
If you can pay them off regularly, however, this can be a great way to build up your credit and they are extremely flexible.
Like we said, unsecured lines of credit always have higher interest rates, as it is a riskier loan for the creditor. If you spend $10,000 on your credit cards and only make the minimum payments for a year, you could easily be looking at an additional $2,500 that you owe on that bill.
The limits to your credit will also be a lot lower, considering the risk the lender is taking. If you’re looking for a lot of money at once for the loan, this isn’t the way to go.
What Is A Secured Line Of Credit?
If you have a secured line of credit, you probably know it. A secured credit line is a credit offered with an asset for collateral, such as a home or a car. If you cannot pay back the loan, the collateral will be forfeited to the creditor.
The most common example of a secured line is home mortgages. In the event of a default, your home can be forfeited or liquidated by the creditor. There are other less-common examples, however.
For secured credit cards, sometimes you pay the desired credit limit upfront and you use that as collateral. Then it is like borrowing money from yourself, which is a very safe way for you to build up your credit, and a safe line for the creditor.
Secured lines come with, well, security. Plain and simple. A secured line of credit uses your home or property as collateral.
Secured lines are excellent for building up your credit score and limiting the interest you pay. These are the safest options both for the lender and the consumer.
Because the lender is certain it will get its money back, the interest is lower and the limit is higher. You are also more likely to pay back the loan in order to avoid asset forfeiture.
The disadvantages are rather obvious in this case. The biggest is the possibility of defaulting and losing your assets.
Which Is Better? Secured vs Unsecured Line of Credit
Well, the answer is tricky. They both have their intended purposes. If you are looking for a long-term loan with a high limit and low interest, a secured line is the way to go. However, that’s only if you are certain you will be able to make the payments.
In the case of a mortgage, a lot can happen in 15-30 years. It is critical that you have money saved up to continue these payments in the event that you lose your job or have to reduce your income for various circumstances. This is the best way to avoid asset seizure.
A secured credit card may even be the way to go if you have a low credit score, or if you have no credit at all. It depends on your needs.
However, if you’re looking for a short-term loan that you’ll be paying off in full frequently (ideally, every month), then an unsecured line may be right for you. Interest rates will be high and limits will be low, but if you’re looking to just build up your credit score and you know you’ll be able to pay it off regularly, then, by all means, this option will be fine.
How To Get A Loan With Bad Credit
You may be reading this and not knowing if any of this applies to you, especially if you have a bad credit score. Well, you’re not out of luck. If you’re looking to buy a home or make a big purchase, but you have bad credit, there are still options for you.
There’s no perfect choice between a secured line or an unsecured line of credit. They both have their pros and cons. There isn’t one right answer for everybody, so it entirely depends on your needs.
Now that you know the difference, make your choice wisely, and find out what else might make you a high-risk borrower so you can keep building that credit! For a free consultation, call us toll-free at 1-855-668-3074 or apply online and let us start working on your HELOC approval now!