Secured vs. Unsecured Loan: What’s the Difference?

Secured loans are backed by a valuable asset, while an unsecured loan does not require collateral.

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 versus unsecured loans.

What are secured loans?

Secured loans are loans backed with something of value that you own, called collateral. Common examples of collateral include your car, truck, motorcycle or home. Whether you’re still making payments or your car is fully paid off, securing a loan with collateral could give you more options.

Here are some common examples of secured debt:

• Mortgages: When you take out a mortgage to buy a home, the house itself serves as collateral for the loan. If you fail to make your mortgage payments, the lender can foreclose on the property to recover their investment.

• Auto loans: When you finance the purchase of a vehicle, the car itself serves as collateral. If you default on the loan, the lender can repossess the vehicle to recoup their losses.

• Secured personal loans: Some personal loans are secured by collateral — something of value you own, such as a car or house. If you default on the loan, the lender has the right to take possession of the collateral to recover the amount owed.

Here’s how it works: If you’re approved for a secured loan, the lender typically places a lien on that collateral, so you may have difficulty selling it until the loan is paid off. In some cases, a lender will hold the title or property deed to the collateral, although this practice is less common. If you do not repay your loan, the lien may permit the lender to take possession of the collateral or start a legal proceeding to do so, then sell it and use the money made on the purchase to pay your outstanding loan.

Secured loans often come with more options; you may get access to lower interest rates, lower monthly payments or a higher borrowing amount. A secured personal loan can be an option worth considering, especially if you have a fair or poor credit score, because using collateral can improve your odds of getting approved for a loan.

Pros and cons of secured loans

Pros of secured loans

• Lower interest rates: Secured loans typically offer lower interest rates compared to unsecured loans, because they pose less risk to lenders.

• Higher borrowing amounts: Borrowers can usually obtain larger loan amounts since the loan is backed by collateral.

• Easier to qualify for: Due to the reduced risk, secured loans may be easier to qualify for, even for borrowers with lower credit scores.

Cons of secured loans

• Risk of losing collateral: If the borrower defaults, the lender could seize the asset used as collateral.

• Additional paperwork: Securing a loan with collateral generally involves more paperwork so the lender can verify ownership, insurance coverage and the value of the asset.

• Potential for overborrowing: The availability of larger loan amounts can tempt borrowers to take on more debt than they can manage, which may lead to financial strain.

What is an unsecured loan?

Unsecured loans don’t require you to secure your debt with personal property (collateral). Instead, a lender considers your credit history, income and other factors to determine your creditworthiness and ability to repay the loan.

Some examples of unsecured debt include:

• Credit cards: Credit card debt is one of the most prevalent forms of unsecured debt. Borrowers could make purchases up to a certain limit and are required to pay back at least the minimum amount due each month.

• Personal loans: These are loans that can be used for a variety of purposes, such as consolidating debt, making large purchases or covering unexpected expenses. Personal loans often do not require collateral.

• Student loans: Many student loans, particularly federal student loans in the United States, are unsecured. Borrowers receive funds for education and agree to pay back the funds once they graduate.

When you don’t back up your loan with collateral, it could mean lower loan amounts, higher interest rates and tougher approvals.

Although your property is not at risk with an unsecured loan, the lender may still take legal action to enforce a debt that has not been repaid.

Pros and cons of unsecured loans

Pros of unsecured loans

• No collateral required: You don't need to provide assets like a house or car as security, reducing the risk of losing valuable property.

• Faster approval: The application process is often quicker since there's no need to evaluate collateral.

Cons of unsecured loans

• Higher interest rates: Lenders may compensate for the increased risk by charging higher interest rates compared to secured loans.

• Stricter eligibility criteria: Good credit history and a stable income are often required to qualify.

• Lower loan amounts: Because there's no collateral, lenders may offer smaller loan amounts than with secured loans.

Can a lender offer you both secured and unsecured loans?

Some lenders may offer the option of a secured or unsecured personal loan or line of credit like a credit card. The lender could determine that you need collateral in order to secure the loan, depending on factors like the size of the loan and your credit and/or income.

Should you get a secured or unsecured loan?

When deciding between secured versus unsecured loans, many factors come into play. Some lenders like OneMain will consider you for both an unsecured and secured loan and offer you options.

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. It could also result in a lower interest rate and higher loan amount.

On the other hand, if you’re offered an unsecured loan, have no item to put up as collateral and are comfortable with the loan terms, that 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 previous postings in 2020 and 2022 Matt Diehl, Kia Jackson, and Kim Gallagher contributed.