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Secured vs. Unsecured Personal Loans

Most personal loans are unsecured, but some lenders offer secured loans that are backed by collateral and may have lower rates.
Sept. 13, 2016
Loans, Personal Loans
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Personal loans are either secured by collateral or unsecured and backed solely by your creditworthiness. One big difference between the two is what happens if you stop making payments, or default, on the loan.

Learn about the differences between secured and unsecured loans to decide which type of loan works best for you.

Secured personal loans

Borrowers who don’t qualify for an unsecured personal loan may be approved for a secured loan backed by the value of a car, savings account or certificate of deposit.

Cost: Starting annual percentage rates on loans with collateral may be lower than those on loans without it.

If you default: A secured loan agreement gives the lender the right to seize the collateral without going to court. You likely would get a chance to make good on the debt before the lender places a lien against your asset.

Best for: Secured personal loans are good for borrowers with average to poor credit who don’t qualify for an unsecured loan.

Before you take a secured loan, consider the consequences of losing the asset you’re pledging.

Before you take a secured loan, consider the consequences of losing the asset you’re pledging. You shouldn’t risk the car you use to get to work, for example.

Where to apply: Secured personal loans are less common than unsecured loans. Banks, credit unions and a few online lenders offer secured loans that are backed with a car, savings account or CDs.

Wells Fargo lets borrowers use savings accounts or CDs as collateral for its personal loans. Mariner Finance offers auto equity loans and requires borrowers to secure loans of more than $10,000. OneMain Financial offers secured loans for car owners with poor credit scores.

Examples of other secured loans include:

  • Mortgage: You borrow money to buy a home, and the property is collateral for the loan. You risk losing the house if you default.
  • Home equity loan or line of credit: This is a type of second mortgage where you use the equity in your home as collateral for a loan. Like a mortgage, you can lose the home if you stop making payments toward the loan.
  • Auto loans: You take out a loan to buy a vehicle, with the car used as collateral for the loan. If you default, the lender can take ownership of the car.

Unsecured personal loans

An unsecured loan is based only on your creditworthiness and ability to repay. If you default on the loan, the lender can’t take your property. Most personal loans are unsecured.

Cost: The APR you receive on an unsecured loan may be higher than one on a secured loan because there’s no underlying asset for the creditor to seize if you don’t repay the loan.

» MORE: Find an unsecured personal loan

Unsecured loans work best for borrowers with good credit who don’t want to pledge an asset.

If you default: Borrowers still face consequences for defaulting, including a tarnished credit score and potential for collections. However, the creditor would have to sue and win a court judgment to collect what you owe.

Best for: Unsecured personal loans work best for borrowers with good to excellent credit who don’t want to risk losing an asset. These loans can be used to consolidate debts, finance home improvements or other large purchases.

» MORE: Ways to use a personal loan

Where to apply: Unsecured personal loans are available through online lenders, as well as credit unions and some banks. Rates and terms vary and are based mainly on your credit score and income. Many online lenders allow you to pre-qualify without impacting your credit score. Click the button below to pre-qualify on NerdWallet and receive a personalized rate from multiple lenders.

Other forms of unsecured loans

  • Credit cards: You borrow money up to a certain limit, paying back the borrowed amount plus interest. Credit cards are usually unsecured, with approval based on your creditworthiness.
  • Personal lines of credit:  Similar to a credit card, a personal line of credit gives you access to credit, and you only pay interest on what you use. Borrowing amounts for a personal line of credit are typically higher than credit cards, and interest rates may be lower than what you’d get from a credit card.
  • Student loans: Loans for education are typically unsecured. Interest rates depend on your credit score, and are typically lower on federal loans than on private loans.

Before you take a personal loan

Whether your loan is secured or unsecured, an APR below 36% should be your goal. That mark is the widely accepted upper limit of affordability.

A higher credit score gives you a better chance of qualifying and getting a lower rate.

Check your credit score before applying for a loan. A higher credit score gives you a better chance of qualifying and getting a lower rate. Then consider pre-qualifying for loans, to compare rates and terms from several lenders.

If you’re rejected for both unsecured and secured loans, you may be tempted to turn to predatory lenders that don’t check your credit, such as payday lenders, auto-title lenders and payday installment lenders. But these loans come at a heavy price — the average APR typically is 300% or more on auto title loans and 390% on payday loans.

There are better alternatives for fast cash if you really need the money.

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