Secured Loans vs. Unsecured Loans: What’s the Difference?

Many personal loans are unsecured, but some lenders offer secured loans that are backed by collateral.

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The main difference between secured and unsecured loans is collateral: 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 are key differences in how secured loans versus unsecured loans work, which lenders offer them and how to qualify.

How do secured loans 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 take your application a step further to 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.

What to know about secured loans

Qualifying: Secured personal loans can be easier to qualify for than unsecured loans. A lender considers your credit score, history, income and debts, but adding collateral to the application can lower the lender’s risk and give it more confidence to lend to you.

Rates: Secured loans typically have lower annual percentage rates than unsecured loans. Rates are decided using the same factors lenders review to qualify you, 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.

Repayments: Secured personal loans are usually repaid in fixed, monthly installments over a few years. Secured loans may have variable rates, which means monthly payment amounts can also vary.

Risk: The penalty for not repaying a secured loan is twofold: Your credit will suffer, and the lender can seize the collateral, sometimes after only a few missed payments.

Even one missed payment can drop your credit score by as many as 100 points, and the impact on your credit won’t be softened because it’s a secured loan.

Where to get them: 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: Oportun, Upgrade and OneMain all offer vehicle-secured loans. The lender may want the vehicle appraised before it lends to you.

Examples of secured loans

You can use funds from a secured personal loan for almost any purpose. You might secure the loan with a car you own, but you can use the funds for a home improvement project or other large expense.

In other cases, what you use the loan for can be your collateral. RV loans and boat loans, for example, are secured by the camper or boat that you buy.

How do unsecured loans work?

An unsecured loan doesn’t require collateral, so approval is based on your credit. For some borrowers, this could mean paying more interest than they would with a secured loan, but they won’t risk losing an asset.

What to know about unsecured loans

Qualifying: Borrowers with good and excellent credit (690 or higher FICO) usually have the best chance of qualifying for an unsecured loan. Lenders review your credit score, history and debt-to-income ratio to decide whether you qualify. Some lenders review alternative data like your college education and where you live, too.

Rates: Unsecured loans have fixed rates that typically range from 6% to 36%. The lowest APRs usually go to the most qualified borrowers, while borrowers with fair or bad credit scores (689 or lower FICO) will get higher rates.

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 your monthly payments.

If the loan is in default, which happens between 30 and 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 if you’re already a customer.

Examples of unsecured loans

There are few restrictions on how you can use the funds from an unsecured personal loan. Common uses include debt consolidation and home improvement projects, both of which can help improve your overall financial picture.

Vacation, wedding and moving loans are also often unsecured, though personal loans are not typically recommended here since there may be more affordable ways to pay.

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Should you get a secured or unsecured personal loan?

If you have an excellent credit score and a debt-to-income ratio below 50%, consider pre-qualifying for an unsecured personal loan to see which rates a lender can offer you. Pre-qualifying doesn’t affect your credit, and it can give you an idea of how the monthly payments will fit into your budget.

With a secured loan, consider whether borrowing money is worth the risk. 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.

Some online lenders offer personal loans for bad-credit borrowers, and they don’t always require collateral. 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.

Use this decision tool to decide whether you should get a secured loan or unsecured loan.

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