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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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 personal loans versus unsecured personal loans work, which lenders offer them and how to qualify.
Pros and cons of secured and unsecured personal loans
| Pros | Cons | |
|---|---|---|
| Secured loans | If you have a low credit score, you may have an easier time qualifying compared with an unsecured loan. | If you fail to repay the loan, the lender can seize the collateral. |
| Unsecured loans | No collateral is required, so you won’t risk losing an asset. | You’ll need a strong credit score and solid finances to get the best offer. |
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 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.
» MORE: What is a secured loan?
What to know about secured personal loans
Qualifying: Secured personal loans can be easier to qualify for than unsecured loans. A lender considers your credit score, credit history, income and debts, but adding collateral to the application can lower the lender’s risk and improve 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, 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. Some 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: Upstart, Upgrade and Best Egg all offer vehicle-secured loans. The lender may want the vehicle appraised before it lends to you.
Funding time: 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. 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.
Other types of secured loans
Other collateral-backed, secured loans include:
How does an unsecured personal loan 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 on a secured loan, but they won’t risk losing an asset.
What to know about unsecured personal loans
Qualifying: Borrowers with good and excellent credit (690 credit score or 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 6% to 36%. The lowest APRs usually go to the most qualified borrowers, while borrowers with fair or bad credit scores (689 credit score or lower) will get higher rates.
Loan amounts: 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. 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 for these expenses since there may be more affordable ways to pay.
Other types of unsecured loans
Other types of unsecured loans include:
A quick look: Unsecured vs. secured personal loans
| Unsecured personal loan | Secured personal loan | |
|---|---|---|
| Collateral needed? | No. | Yes, typically a savings account or vehicle. |
| Qualifying | Lenders qualify borrowers based on credit, income and debt. | Using collateral lowers the lender’s risk and improves your chance of qualifying. |
| Rates | Rates range from 6% to 36%, and those with excellent credit scores and low DTIs get the lowest rates. | Rates tend to be lower than rates for unsecured personal loans. |
| Risk | Defaulting negatively impacts your credit. | Defaulting negatively impacts your credit and the lender can take possession of your collateral. |
| Funding time | Borrowers can receive their money in a day or two. Most loans are funded within a week. | Secured personal loans can take longer to fund than unsecured personal loans but may still be funded in a week or less. |
Should you get a secured or unsecured personal loan?
If you think an unsecured loan may be a good fit for your financial needs, consider pre-qualifying 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. You can usually only pre-qualify for an unsecured personal loan, so use this process to understand what rate you may qualify for before considering a secured personal loan.
If a secured loan is your best option, 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.
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.
» COMPARE: See your bad-credit loan options
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