Ask Oportun: What’s the difference between a secured personal loan and a standard personal loan?

Illustration of a person unlocking access to more money with a key, just like a secured personal loan will do.

The simple answer: A secured personal loan requires you to provide collateral for your loan, while a standard loan does not.

According to the Consumer Financial Protection Bureau, collateral is an asset that secures a loan or other debt.

Both standard and secured personal installment loans allow you to repay your loan in multiple payments over a period of time. They both accrue interest and can have a positive impact on your credit score, if reported, when you make your payments on time and in full.

How do lenders decide if they need collateral?

It’s all about risk. When it comes to loans, lenders provide money to borrowers assuming borrowers will pay back the money, along with any interest and fees. With every loan they make, lenders risk that the borrower might not be able to repay the loan. The amount of risk  lenders believe they take on often determines whether or not they’ll require you to have collateral to secure the loan.

Lenders each have their own ways of calculating risk. Traditional lenders give the most weight to your credit score. Some alternative lenders (like Oportun) also look at things such as your payment history for utility and phone bills, your income, and more.

If you have a history of making payments on time and can show a steady income, lenders assume less risk lending money to you and are less likely to require collateral.

On the other hand, if lenders are unsure of your ability to repay your debts, they may offer you a secured loan. When you secure a loan with collateral, lenders assume less risk because they can use the collateral to pay down your balance if your loan become delinquent. With a secured loan, lenders know they’ll at least get some of their money back.

Collateral can also mean more money. Some lenders may be able to approve you for a standard loan, but not as much as you want or need. If this happens, you might be able to get more money through a secured loan.

How does collateral work?

When you take out a secured loan, your lender puts a lien (or claim) on your collateral. If for some reason you default on your loan, lenders may take your collateral as a form of payment.

But having a lien on your collateral doesn’t impact your daily life. If you use your car as collateral to secure a loan, you still get to drive and keep your car while the loan is open. Once your loan is paid off, the lien is released.

 What does this mean for you?

A secured personal loan can be easier to get if your credit score is low or you have no score at all. This is a huge plus if you are just starting to establish credit history and find that traditional lenders won’t help you.

Plus, when lenders evaluate risk, they really only have your credit history to rely on. They don’t know how your situation may be changing. You’re the only one with a full look at your income and expenses. If you’re confident in your future budget, a secured loan may be a great option to get the loan you need at an affordable rate.

The most important thing you can do when taking out a loan is to take the time you need to understand what you’re being offered. Ask your lender about the interest rate, monthly payments, and loan terms. When you’re confident in your ability to make the monthly payments, you set yourself up for success with any loan.

How we do it at Oportun

When you apply for a loan, you may be offered a secured loan. If you’re offered a secured loan, you can use your car as collateral.

All our loans offer fixed, affordable payments and you don’t need a credit score to apply. We know the path to a better financial future starts with giving people the chance to build credit. That’s why we report your payment history to national credit bureaus to help you establish credit. And we’ll be here to help you understand your loan every step of the way.

 

 

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