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

When you take out a loan, it may be secured or unsecured. Secured loans are backed by something valuable that you own, called collateral, while unsecured loans are not.

Each type of loan has its own advantages and risks, so it's important to know how they work before deciding which one is right for you.

Keep reading to learn about secured and unsecured loans.

What are secured loans?

Secured loans are loans backed with collateral, which can include your car, truck, motorcycle or home. However, if you fail to repay the loan as agreed, the lender could take the collateral to cover their losses.

Securing a loan with collateral could give you more borrowing options, boost your borrowing power with a lower interest rate or a higher loan amount than you may be eligible for with an unsecured loan.

Here are some common examples of secured loans:

• Mortgages: When you take out a mortgage to buy a home, the home itself serves as collateral for the loan.
• Auto loans: When you finance the purchase of a vehicle, the car serves as collateral.
• Secured personal loans: Some personal loans are secured by your car, a motorcycle or other valuable property.

How does a secured personal loan work?

When you apply for a secured personal loan, the lender considers the value of your collateral in addition your income, your credit history and your debt-to-income ratio (DTI) to decide how likely you are to repay the loan. If you have less-than-perfect credit, using collateral may make it easier to get a loan that meets your needs.

When you apply, you will be asked to provide information and documentation to verify the value, ownership, condition and insurance coverage of the property. This means it may take some additional steps to receive your loan.

If you’re approved for a secured loan, the lender typically places a lien, or a legal claim to the property, on the collateral. Then, you’ll receive the funds in a lump sum. After you receive your loan proceeds, you’ll repay it back with interest, which is the cost of borrowing, for the duration of the loan term.

Pros and cons of secured loans

Before deciding between a secured or unsecured loan, it’s important to understand what each type of loan has to offer.

Pros

A secured loan potentially offers several advantages, including:

• Higher borrowing amount: A secured loan may help you qualify for a higher loan amount since the loan is backed by collateral.
• Potentially lower interest rate: Because your loan is backed by an asset, like a car, you may qualify for a lower interest rate — which could make your loan less expensive overall.
• May be easier to qualify for: If your credit history is limited or your credit score is lower than you'd like, it may be easier to get approved for a secured loan than an unsecured loan.

Cons

While secured loans offer some clear benefits, they also come with potential cons worth considering before you apply:

• Additional requirements: Before approving a secured loan, the lender will typically appraise your collateral to determine its current market value, verify ownership and confirm you have adequate insurance coverage.
• Risk of losing collateral: If you are unable to repay your secured loan, the lender could take your collateral.
• Potential for overborrowing: When larger loan amounts are available, you may be tempted to borrow more than you need.

What is an unsecured loan?

An unsecured loan isn’t backed with collateral. Instead, a lender focuses solely on your credit history, income and other factors that determine how likely you are to repay the loan.

Some examples of unsecured loans include:

• Unsecured personal loan: An unsecured personal loan is a type of installment loan that can be used for almost anything, including consolidating debt, making large purchases or covering unexpected expenses.
• Student loan: Student loans, particularly federal student loans, are unsecured. Borrowers receive funds for education and agree to pay back the funds once they graduate.

Although there’s no collateral for a lender to take for an unsecured loan, the lender may still take legal action if you do not repay your debt.

Pros

There are some benefits to unsecured loans, including:

• No collateral needed: An unsecured loan doesn’t require you to pledge something of value to the lender.
• Faster approval: The application process is often quicker since there’s no need to evaluate collateral.
• No risk to assets: Since you’re not required to pledge collateral, you won’t risk losing your assets if you fall behind on payments.

Cons

Drawbacks to an unsecured loan may include:

• Stricter qualification requirements: Without collateral to back the loan, lenders rely more heavily on the applicant’s credit history and income to assess risk.
• Higher interest rates: Lenders may compensate for the increased risk by charging a higher interest rate compared to a secured loan.
• Potentially lower loan amount: Unsecured loans may offer lower borrowing limits than secured loans.

Can a lender offer you both secured and unsecured loans?

If you apply for a secured personal loan, some lenders, including OneMain, will offer the option of either a secured or unsecured loan if you qualify for both. Otherwise, the lender may only offer a secured loan, depending on factors like the size of the loan and your credit history and/or income.

Should you get a secured or unsecured loan?

When deciding between secured and unsecured loans, many factors come into play.

If you’re working to build or improve your credit and have a vehicle or other form of collateral, applying for a secured loan could increase the likelihood of approval. Using collateral to secure a loan could also result in a lower interest rate and higher loan amount.

On the other hand, if you don’t have collateral or don’t want to use it, applying for an unsecured loan may be a good choice for you. Either way, take time to understand your options before applying to be sure you make the right decision for your needs and goals.

---

---

This article has been updated from a previous posting on February 14, 2025. Kia Jackson contributed.