Short Term Personal Loans: Secured vs Unsecured

Short term personal loans are loans that financial institutions give to people needing immediate cash. There are two main types of short term personal loans: secured and unsecured. Both types generally have higher interest rates than long-term loans; however, since they have a shorter repayment term, borrowers can repay the loan more quickly.

Secured Loans

A secured loan is when the borrower puts up some asset (e.g. home or car) as collateral to back the loan. It is called a secured loan because it poses less risk for financial institutions; for example, if the borrower defaults on payments, the creditor can repossess the asset to satisfy the debt.

Secured short term personal loans are a great way to acquire quick cash. By putting up collateral, the financial institution will be comfortable lending you more money at a lower interest rate.

Many people use secured loans not simply for emergency cash, but for home equity loans, debt consolidation, second mortgages, or home equity credit lines.

You may qualify for a secured loan even if you have poor credit, as long as you place a valuable asset as collateral.

Unsecured Loans

What if you are a renter and do not have property to set as collateral? In this case, you may be eligible for an unsecured loan. Unsecured loans do not require collateral to back the loan. Homeowners who do not want to put their property up as collateral can also get unsecured loans.

Unsecured short term personal loans pose a higher risk for financial institution, as they have nothing to repossess if borrowers cannot fulfill payment obligations. To make up for lack of collateral, banks charge high interest rates for unsecured loans. If you apply for an unsecured loan, whether it be in-person or online, be sure to seek the lowest interest rate you can find. Be aware of fees and penalties associated with the loan, too.

Unsecured loans are also beneficial for people with poor credit scores. Some borrowers even get an unsecured loan to improve their credit score, as repaying the loan on time can and will increase your score.

Commonalities of Short Term Personal Loans

Secured and unsecured short term personal loans have many things in common, including:

  •  fixed interest rate;
  •  short repayment terms;
  •  monthly payments of interest and principal;
  •  instant cash, generally within 2 business days;
  •  online application and access;
  •  no prepayment penalties (in most cases).

 Talk with your bank or financial advisor to determine the best type of loan for you.

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