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Secured vs. Unsecured Loan: What’s the Difference?
Many personal loans are unsecured, but some lenders offer secured loans that are backed by collateral.
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Jackie Veling covers personal loans for NerdWallet. Her work has been featured in The Associated Press, the Los Angeles Times, The Washington Post, Yahoo Finance and elsewhere. Her work has also been cited by the Harvard Kennedy School. Prior to that, she ran a freelance writing and editing business. She graduated from Indiana University with a bachelor’s degree in journalism.
Kim Lowe is Head of Content for NerdWallet's Personal Loans team. She joined NerdWallet in 2016 after 15 years at MSN.com, where she held various content roles including editor-in-chief of the health and food sections. Kim started her career as a writer for print and web publications that covered the mortgage, supermarket and restaurant industries. Kim earned a bachelor's degree in journalism from the University of Iowa and a Master of Business Administration from the University of Washington. She works from her home near Portland, Oregon.
Laura McMullen assigns and edits content related to personal loans and student loans. She previously edited money news content. Before then, Laura was a senior writer at NerdWallet and covered saving, making and budgeting money; she also contributed to the "Millennial Money" column for The Associated Press. Before joining NerdWallet in 2015, Laura worked for U.S. News & World Report, where she wrote and edited content related to careers, wellness and education and also contributed to the company's rankings projects. Before working at U.S. News & World Report, Laura interned at Vice Media and studied journalism, history and Arabic at Ohio University. Laura lives in Washington, D.C.
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The main difference between secured and unsecured loans is collateral, which is something you own that a lender can take if you don’t repay. A secured loan requires collateral, while an unsecured loan does not.
Unsecured loans are the more common of the two types of personal loans, but interest rates can be higher since they’re backed only by your creditworthiness.
Here's a quick look at the key differences between secured and unsecured personal loans:
Feature
Secured personal loans
Unsecured personal loans
Collateral needed?
Yes, typically a savings account or vehicle.
No.
Qualifying
Using collateral lowers the lender’s risk and improves your chance of qualifying.
Lenders qualify borrowers based on credit, income and debt.
Rates
Usually lower than unsecured loans.
Often higher, since the lender takes on more risk without collateral.
Risk
Defaulting negatively impacts your credit, and the lender can repossess your collateral.
Defaulting negatively impacts your credit.
Funding time
Can take longer to fund if collateral needs to be verified or appraised, but may still be funded in a week or less.
Borrowers can typically receive their money in a day or two.
Best for
Borrowers who have assets they’re open to risking, who want a lower rate or need a higher loan amount.
Borrowers with strong credit who prefer not to risk an asset.
Read on for details about how each kind of loan works, as well as how to determine which is best for you.
How does a secured personal loan work?
A secured loan requires you to back it with collateral, such as your car or an investment account, as part of the application process.
Collateral can help get you a lower rate on a personal loan or a higher loan amount. But you risk losing your asset if you fail to repay the loan.
Qualifying
Secured personal loans can be easier to qualify for than unsecured loans. When approving or rejecting applications, lenders try to assess the risk of a borrower not repaying the loan. That’s why they look at indicators like credit score, credit history, income and debts.
By adding collateral, the lender may perceive you as less of a risk, given the high stakes of losing your property. That’s why securing your loan with collateral improves your chances of qualifying.
Rates
Secured loans typically have lower annual percentage rates than unsecured loans. Rates are decided using the same factors lenders review to qualify you for the loan, so the value of your collateral can affect your rate.
If you secure financing with a vehicle, for example, the value of the vehicle is a factor in deciding whether you qualify and what rate you’ll get.
Loan amounts
Personal loan amounts typically range from $1,000 to $100,000. Lenders may be more likely to approve you for a larger loan if you get a secured loan.
Repayments
Secured personal loans are usually repaid in fixed, monthly installments over two to seven years. Shorter terms have higher monthly payments, but you pay less interest overall.
Risk
If you’re unable to keep up with payments on a secured loan, the risks are substantial. Missed or defaulted payments can hurt your credit score and lead to the lender repossessing your collateral.
Where to get a secured loan
You can get a secured loan from a bank, credit union or online lender, though they’re more common from banks and credit unions. These loans are typically secured with a savings or certificate of deposit account, which you usually can’t access until the loan is repaid in full.
Online lenders that offer secured loans tend to require a vehicle as collateral: Upstart, Upgrade and Best Egg offer vehicle-secured loans. The lender may want the vehicle appraised before it lends to you.
Most personal loans can be funded within a week. Secured personal loans can take longer to approve and fund than unsecured personal loans if the lender needs additional time to evaluate the collateral.
Uses for secured personal loans
You can use funds from a secured personal loan for almost any purpose, such as a home improvement project or other large expense.
An unsecured loan doesn’t require collateral, so approval is based on your creditworthiness. Some borrowers may pay more interest than they would on a secured loan, but they don’t risk losing an asset.
Qualifying
Borrowers with good and excellent credit (scores from the mid-600s and higher) usually have the best chance of qualifying for an unsecured loan. Lenders review your credit score, credit history and debt-to-income ratio to decide whether you qualify. Some lenders review alternative data like your college education and work experience, too.
Rates
Unsecured loans have fixed rates that typically range from 7% to 36%. The lowest APRs usually go to the most qualified borrowers, while borrowers with fair or bad credit scores (scores from the low 600s and lower) get higher rates.
The amount you qualify for is based on your creditworthiness, income and existing debt. You may not be able to borrow as much as you would with a secured personal loan.
Repayments
Unsecured loans are repaid in fixed, monthly installments, and repayment terms are usually two to seven years.
Risk
Unsecured loans may be a safer choice for some borrowers. If you fail to repay, only your credit will be affected.
Some lenders allow you to go on a hardship plan if you can’t make your monthly payments. These plans can involve lowering or deferring personal loan payments.
If the loan is in default, which happens 90 days after you miss a payment, it could be sent to collections, and ultimately the collections agency can take you to court.
Where to get them
Online lenders can have low rates and features, like fast funding and a fully online process.
Not all banks offer unsecured loans. U.S. Bank, PNC and Wells Fargo are among the national banks that do. Banks may offer a lower rate and additional perks if you’re already a customer.
Credit unions also offer unsecured loans, but you must be a member to borrow.
Funding time
Some lenders can fund unsecured personal loans the same day you apply for the loan or the following day. Most personal loans are funded within a week.
Uses for unsecured personal loans
There are few restrictions on how you can use the funds from an unsecured personal loan. Some lenders don't allow you to use the funds for college tuition, business expenses or investments, for example.
If you take out an unsecured personal loan, NerdWallet recommends using it for expenses that could improve your overall financial picture, like debt consolidation and home improvement projects.
If you plan to tap a loan for expenses like a vacation, wedding or move, first look into more affordable ways to pay.
Should you get a secured or unsecured personal loan?
This decision depends on your credit, what you own and how much risk you’re comfortable taking.
Consider a secured personal loan if …
Your credit isn’t great, you have an asset to use as collateral or you need to borrow a large amount. Collateral can help you qualify or get a better rate — but you risk losing that asset if you can’t repay.
Weigh the risk carefully before borrowing. For example, if you need your car to get to work and a lender requires it as collateral, losing the car could also cause you to lose income. But if you’re confident that you can make your payments on time and want a lower rate, collateral can be a good way to get there.
Alternatively, if you suspect your credit is getting in the way of qualifying for an unsecured loan, consider online lenders that offer personal loans specifically for borrowers with bad credit. They don’t always require collateral.
In any case, even if a secured loan seems like the best fit, pre-qualify for an unsecured loan first. There’s nothing to lose, given pre-qualifying doesn’t affect your credit or take much time. The process will show you what rates you may qualify for, which can help you compare offers, no matter which kind of loan you choose.
Nerdy Perspective
“If you need a personal loan, but you're unsure if you'll qualify — and you have collateral to pledge — then a secured loan may be the right choice. I recommend doing two things first. Pre-qualify for an unsecured loan with a few lenders to see if you qualify. There's no risk to your credit score to pre-qualify. Then, if you still want a secured loan, plug the numbers (loan amount, APR, term) into a personal loan calculator to see your monthly payment. You want to be absolutely sure you can afford this payment for the entire term before pledging your car or other collateral."
Jackie Veling
Lead Writer and Content Strategist
Consider an unsecured personal loan if …
You have solid credit or don’t want to risk property. You’ll avoid the risk of losing an asset, though rates are usually higher.
If you think an unsecured loan may be a good fit for your needs, pre-qualify with multiple lenders to see which rates you qualify for. This step can give you an idea of how the monthly payments will fit into your budget.
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