The main difference between secured and unsecured personal loans is that a secured loan requires collateral (something valuable you own), while an unsecured loan does not.
Unsecured personal loans are more common than secured 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, the loan is backed by your creditworthiness and ability to repay. |
Best if you: |
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Rates | Usually lower than unsecured loans. | Often higher, since the lender takes on more risk without collateral. |
Funding time | Can take longer if the lender needs to appraise or verify your collateral. | Usually one or two days after you accept the offer. |
What happens if you default? |
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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 use an asset, like a car you own or a savings or investment account, as collateral when you apply.
Collateral can help you get approved for a personal loan, qualify for a lower rate or get a higher loan amount. But you risk losing your asset if you fail to repay the loan.
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 are three lenders we review that have vehicle-backed loans. The lender may want the vehicle appraised before it lends to you.
Qualifying
Secured personal loans can be easier to qualify for than unsecured loans because they’re less risky to the lender. If you default, the lender can seize your asset to recoup its losses.
Lenders will still consider your credit score, income and debts when you apply for a secured loan. But the lender may perceive you as less of a risk and have more flexibility with their requirements, given the high stakes of losing your property.
Rates
Secured loans typically have lower annual percentage rates than unsecured loans. For example, secured loans through Upgrade may have rates that are 1 to 10 percentage points lower than rates on its unsecured loans.
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
Like unsecured loans, 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, your lender could repossess your collateral. Missed or defaulted payments can also hurt your credit score and lead to creditor lawsuits.
Funding time
Secured personal loans can take longer to approve and fund than unsecured personal loans. The lender may need additional documentation and time to evaluate your 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.
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 creditworthiness. You may pay more interest than you would on a secured loan, but you don’t risk losing an asset.
Where to get unsecured loans
As with secured loans, online lenders, banks and credit unions offer unsecured loans. Online lenders have fast funding and a convenient application process.
Banks and credit unions may offer lower rates if you’re already a customer or member. Not all banks offer unsecured loans; U.S. Bank and Wells Fargo are among the national banks we review that offer unsecured personal loans.
Qualifying
Borrowers with good and excellent credit (scores of 690 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 6% to 36%. The lowest rates usually go to the most qualified borrowers, while borrowers with fair or bad credit scores (scores of 689 and lower) get higher rates. Borrowers with good credit who pre-qualified through NerdWallet in the last 30 days received an average rate of 19.63%.
» COMPARE: Best unsecured loans
Loan amounts
The amount you qualify for is based on your creditworthiness, income and existing debt. With an unsecured loan, 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
Late or missed payments on an unsecured personal loan can result in fees and damage to your credit score. Many lenders will consider the loan in default after about 90 days of missed payments. At that point, your account may be sent to collections and you could be sued over the debt. However, since you don’t provide collateral with an unsecured loan, you won’t risk losing your property.
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.
Funding time
Many lenders can fund unsecured personal loans the same day you apply or the following day.
Uses for unsecured personal loans
There are few restrictions on how you can use the funds from an unsecured personal loan. However, some lenders don't allow you to use the funds for college tuition, business expenses or investments.
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.
For expenses like a vacation, wedding or move, consider whether you can build your savings in advance so you won’t have to pay loan interest.
Other types of unsecured loans
Other types of unsecured loans include:
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.
» COMPARE: Loans for borrowers with bad credit
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.
