By Gayle SatoSecured vs. Unsecured Personal Loans: What’s the Difference?
Quick Answer
Secured personal loans are backed by collateral; unsecured personal loans are not. By pledging a valuable asset, you may be able to get loan approval, a lower interest rate or a higher loan amount on a secured personal loan.
The difference between secured and unsecured personal loans is simple: A secured personal loan requires collateral while an unsecured personal loan does not.
Both types of personal loans let you borrow cash and repay it in regular installments. Personal loans are useful to cover large expenses or consolidate high-interest credit card debt. A secured personal loan requires you to pledge an asset with monetary value (such as a car or savings account) that your lender can seize if you fail to repay your loan. Collateral represents additional risk to you, but less risk for the lender. Adding collateral may increase the chances that your loan will be approved, in the amount you want and at a favorable interest rate.
Secured vs. Unsecured Personal Loans
Here's more about the differences between secured and unsecured personal loans, and when each type of loan might work best for you.
| Unsecured Personal Loan | Secured Personal Loan | |
|---|---|---|
| Collateral required? | No | Secured by an asset of value, such as a savings account, car or stock assets |
| Credit requirements | Typically 580 minimum to qualify and 700 to secure a low interest rate | Varies; some loans have no minimum credit score |
| Interest rates | Vary based on your creditworthiness | Vary, but may be lower than for unsecured personal loans |
| Loan amounts | Typically based on your credit score, debt-to-income ratio and other financial factors | May be higher than for an unsecured loan, depending on the value of your collateral |
| Funding time | Turnarounds can be quick, sometimes within a day | Processing times may be longer if an appraisal or confirmation of assets is required |
| Risk to borrower | Collections, fees and credit damage if loan payments are late or loan goes into default | Collections, fees and credit damage if loan payments are late or loan goes into default Lender may seize your collateral if you fail to pay |
What Is a Secured Personal Loan?
A secured personal loan uses a valuable asset, such as a certificate of deposit (CD), savings account or car, as collateral on an installment loan. If you fail to pay the loan back, the lender can seize the asset to help recoup their loss. Because these loans are secured, lenders consider them less risky. For that reason, credit requirements may be less stringent and you may qualify for a higher loan amount.
Secured personal loans are available from banks, credit unions and some online lenders. Other types of secured loans include mortgages, car loans and home equity loans—all of which are backed by collateral.
Learn more: What Can Be Used as Collateral on a Personal Loan?
Pros and Cons of Secured Personal Loans
A secured personal loan is both easier and more difficult to get. If you're having a hard time qualifying for the loan you want at the interest rate you want, adding collateral to your financial profile can help. At the same time, collateral can complicate the application process—and your decision about whether a secured loan is right for you.
Here are a few pros and cons for secured personal loans:
Pros
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Easier loan approval: Because you have an incentive to repay a secured loan, you may be less likely to default. Adding collateral can make your loan application more likely to be approved.
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Lower interest rate: You may be offered a lower interest rate when you put up collateral because you're considered less risky as a borrower.
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Larger loan amount: Securing a loan with collateral may also unlock a higher loan amount. If your loan is secured by a savings account, for example, you may be able to borrow up to your account balance.
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Credit-building: Secured personal loans can help you build credit by adding to your credit mix and creating a positive payment history.
Cons
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Collateral required: Common types of collateral include savings accounts, CDs, investment accounts and cars. To use your car as collateral, you generally need to own your car outright. If you pledge savings or a CD, your account may be locked to ensure you don't withdraw the funds you're using as collateral.
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Risk of loss: The lender may seize your collateral if you fail to pay your loan. Make sure you read your loan documents carefully so you know when and how seizure of property might occur.
Tip: Car title loans that charge interest rates of up to 300% and require repayment in 15 to 30 days are not the same as secured personal loans. Find out the differences before you sign.
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What Is an Unsecured Personal Loan?
An unsecured personal loan is an installment loan that doesn't require collateral. Lenders rely on your credit and financial factors like your debt-to-income ratio (DTI) to assess your likelihood of repaying the loan. They also use your credit score to help determine the interest rate they offer you.
Although a secured loan might get you a lower interest rate or a larger loan amount, an unsecured loan doesn't put your assets at risk. Unsecured personal loans are more widely available as well: You can find them at banks, credit unions and from online lenders. Other common types of unsecured credit are credit cards and student loans.
Learn more: How to Compare Personal Loans
Pros and Cons of Unsecured Personal Loans
If you have good credit and a strong DTI, an unsecured personal loan is a simpler choice. They're easier to find, easier to apply for and may even be faster to fund. Here are a few unsecured personal loan pros and cons to consider:
Pros
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No collateral needed: You don't have to try to identify assets you can use for collateral, which can be tricky. If you have an unusual asset, like a piece of art or jewelry, you may have a harder time finding a lender that will accept it as collateral.
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No risk of seizure: While you still want to avoid late payments or default, your assets won't be at risk.
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Widely available: Unsecured personal loans are easier to find than secured loans.
Cons
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Stricter credit requirements: Without collateral, your loan application will rely more heavily on your credit score and history for approval.
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Potentially higher interest rates: Although credit requirements vary, you typically need a minimum score of 580 to qualify and 700 to qualify for a favorable interest rate on an unsecured personal loan.
Learn more: How to Get a Personal Loan, Step-by-Step
How Do Secured and Unsecured Personal Loans Affect Your Credit?
Both secured and unsecured loans affect your credit similarly. Lenders will check your credit score and report during the application process and will use that information to decide whether to approve your loan and to set your interest rate. As part of the application process, they'll make a hard inquiry into your credit, which could have a small, temporary effect on your credit score.
Once you have the loan, they'll report your payment history and balance (and any negative information, such as collections, defaults, foreclosures or legal judgments), to one or more of the credit bureaus: Experian, TransUnion and Equifax.
It's important to note that, if you fail to pay a secured loan, your lender will seize your collateral. They'll also report the delinquency to credit bureaus, resulting in double difficulties—a loss of assets and damage to your credit.
Making your loan payments on time can help you build credit. If you're using secured or unsecured personal loans to consolidate credit card debt, you may improve your credit score by reducing your credit utilization. Because your credit plays an important role in getting a secured or unsecured personal loan, you may want to check your credit score and report before you start looking for loans. You can check both anytime for free with Experian.
Should You Get a Secured or Unsecured Personal Loan?
Choosing between a secured and an unsecured personal loan generally comes down to your personal circumstances.
When to Consider Getting a Secured Personal Loan
- You're having trouble getting approved for an unsecured loan. Whether the obstacle is a low credit score or limited income, collateral could tip the scales on your approval.
- You need a better interest rate or higher loan amount. Collateral can also be the boost you need to get an affordable loan or adequate lump sum.
- You have collateral to pledge. You may not have an asset that will work. If you don't own your car free and clear, or you don't want to tie up your savings, a secured loan might not be a good fit. If you have home equity instead, you may want to consider a home equity loan.
When to Consider Getting an Unsecured Personal Loan
- You have the credit and income to qualify. If you have great credit and are offered a low interest rate, you may not need a secured loan.
- You don't want to risk your assets. If you aren't able to pay your loan, you could lose your collateral. An unsecured loan keeps your assets off the table.
- You want a fast loan turnaround. Applying for a secured loan can take more time, especially if the lender needs to appraise or verify your assets. Some unsecured loans can be funded in a day.
The Bottom Line
Whether you choose a secured personal loan or an unsecured loan, comparing multiple loans can be helpful. Checking with your bank or credit union—and other financial institutions—is a good place to start. Shopping online for loans is another easy way to see multiple options.
Many lenders will prequalify you using a soft credit pull that doesn't affect your credit score so you can find out how much you're approved to borrow and at what annual percentage rate. If you're unhappy with your unsecured personal loan options, you may want to consider a secured personal loan.
In either case, knowing your credit score and history can help you shop for loans more efficiently. Free credit monitoring from Experian can help. You'll be alerted whenever there are changes to your credit file, so you'll always be current on where you stand.
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About the author
Gayle Sato
Gayle Sato writes about financial services and personal financial wellness, with a special focus on how digital transformation is changing our relationship with money. As a business and health writer for more than two decades, she has covered the shift from traditional money management to a world of instant, invisible payments and on-the-fly mobile security apps.
Read more from Gayle