Arizona Tribune - Can I Convert a Secured Loan to an Unsecured Loan?

Secured loans rely on the borrower to provide an asset, such as a house or car, as collateral to back the loan. When a borrower provides collateral, the lender places a lien on it. If the secured loan borrower defaults on the loan, the lien gives the lender the legal right to take the collateral to recover their loss.

The value of the collateral reduces the lender's risk when issuing the loan. That means lenders may be willing to accept a lower credit score if the debt is secured by collateral. Other factors, such as the applicant's income and debt-to-income ratio, also play a part in determining eligibility for a loan.

Secured loans can be a good option for people who have a poor credit history or none at all.

What are unsecured loans?

Unsecured loans are issued by the lender based on the applicant's credit history, income and debt-to-income ratio. These factors allow the lender to determine how likely the borrower is to repay the loan.

People with a good credit score and low debt-to-income ratio are typically considered more likely to repay a loan. However, without collateral, the risk of non-payment of an unsecured loan is greater for the lender than with a secured loan, so loan amounts may be smaller, and interest rates may be higher for these types of loans.

Can I change my secured loan to an unsecured loan?

Removing collateral from a secured loan without replacing it with something else is technically possible, if your lender agrees to it, but it's not common.¹ If you're struggling to keep up with a secured loan, you may have better luck asking your lender whether they offer other personal loan modifications instead. Loan modifications change the loan terms to help you remain in good standing. For example, you might be able to change the interest rate or extend the loan term to make your payments smaller.²

Another option, which may depend on whether your financial situation and credit score have improved, would be to refinance your secured loan with an unsecured loan. Refinancing with an unsecured loan means taking out a new unsecured loan that you can use to pay off your existing secured loan. Keep in mind that while you'll no longer have to worry about losing your collateral, refinancing with an unsecured loan may mean you'll have to accept a higher interest rate³ and extend your repayment period, which could cost you more money overall.⁴

Regardless of which route you choose, it's a good idea to do your research and talk to your lender before deciding what course of action to take.

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Ch.P.Lewis--AT