What is the Difference Between a Secured and Unsecured Loan?

There are two types of loans: secured and unsecured loans. A secured loan requires the borrower to provide collateral. One example of a secured loan is a home Mortgage; the home is the collateral that secures the loan. An unsecured loan does not require any collateral, only a promise from the borrower to repay the loan. Examples of unsecured loans include Credit Cards and Signature Loans.

Signature Loan Interest Rates are Typically Lower than Credit Card Rates

Signature Loan interest rates are often lower than Credit Card rates, which can be in the double digits unless you qualify for special promotional offers. The problem with Credit Card promotions is the fact that they include “promotional period” end dates, at which time rates increase exponentially.

If you opt to use a Credit Card for a large purchase, you will only incur Credit Card finance charges if you fail to pay for the entire purchase within 30 days. If you do not have the ability to repay a borrowed amount in 30 days or less, a Signature Loan proves to be the better solution. National Police Credit Union has competitive rates for Secured and Unsecured Loans to fit your needs. 

Signature Loan Benefits:

A Signature Loan is considered an “installment” debt. You receive funds in one lump sum to pay back in equal increments over a defined period of time. Terms typically range from two to five years, depending on the amount of the loan and the borrower’s personal credit history. Installment loans usually come with fixed interest rates and the ability to make extra payments at any time. 

Credit Card Benefits:

Credit Cards are considered “revolving debt” as they feature debt ceilings. This means that available lines of credit are determined by your personal monthly spending habits and expediency in paying bills in full and on time. Credit Cards are often considered more popular than Signature Loans for short-term financing needs due to the latter featuring higher interest rates. Credit Cards provide a great source of funds if you are in need of a continual line of credit, which will continue at the same pace and fee-structure as long as your balances are paid in full each month. It is important to note failing to pay balances in full each month will result in increasing balances and related finance fees, which will, in turn, affect your credit score.

Credit Card security has become more of an issue in recent years, so make sure your credit union offers the latest technology designed to protect you and your personal information.

How a Signature Loan Affects Your Credit Score

Credit Cards and Signature Loans affect your credit score in different ways. While no one intentionally sets out to hurt their own credit score, sometimes unforeseen circumstances or a lack of information can accidentally cause a dip.

Be sure to research all related information prior to opening a new Credit Card or securing a Signature Loan, no matter how good the terms may sound. A Signature Loan, when paid on time and in full, will not negatively affect your credit score unless you miss payments or fail to pay the loan as agreed.

When reviewing Credit Cards, you should avoid any that include low, introductory offers that significantly inflate once the promotional period concludes. Remember the Credit Card promotions mentioned earlier? Unless you read, understand and accept the fine-print terms, you could wind up with increased hard-to-manage balances which, if left unpaid, could affect your credit score.

In order to secure the best prices and avoid paying interest, it is always best to use cash for large purchases whenever possible. When that is not a viable option, remember the highlights from above: Signature Loans should be used for purchasing items that require longer periods of time to pay for in full; and Credit Cards should be used for maintaining a continual line of credit if you are able to spend and pay for purchases in full each month.