Secured vs. unsecured loans: What are the differences?

Most personal loans are unsecured, meaning they don’t require collateral. However, depending on your situation, a secured personal loan could be a better option.

If you’re loan shopping and comparing a secured vs. an unsecured loan, here’s what you need to know before applying for either option.

What is a secured personal loan?

A secured personal loan requires collateral. Depending on the lender, you might be able to use one of the following to secure your loan:

• A savings account.
• A certificate of deposit (CD).
• A vehicle.
• Your home.
• An investment account.
• Art.
• Jewelry.
• Future paychecks.

In general, the value of the collateral must be equal to or greater than the amount you want to borrow. This is because if you default on your loan payments, the lender can seize your collateral to recoup the remaining loan balance. What’s more, if you’re using a balance in a savings account or CD to secure your loan, the funds will typically be locked and unavailable to use until you pay the loan off.

Other types of secured loans

There are several other types of secured loans, including:

• Auto loans.
• Car title loans.
• Home equity loans.
• Home equity lines of credit (HELOCs).
• Mortgages.
• Pawn shop loans.
• Secured credit cards.
• Secured personal lines of credit.
• Secured small business loans.

Qualifying for a secured personal loan

The exact credit and income criteria you’ll have to meet to get approved for a secured personal loan will vary by lender. However, because secured loans aren’t as risky for lenders, they tend to have less stringent requirements than unsecured loans. This can also result in lower interest rates compared to those of unsecured loans.

“A secured personal loan might be your only option if you have poor credit,” says Leslie Tayne, a debt attorney at Tayne Law Group. “If your credit score doesn’t inspire lender confidence, the bank may need collateral from you to feel comfortable with the risk of loaning you money.”

Because they’re generally easier to qualify for, secured personal loans can also be a good way to rebuild bad credit — or even to build your credit history from scratch. Still, lenders will have minimum income and credit score requirements, which will vary by lender.

Borrowing with poor credit is possible: See the best personal loans for bad credit

Where to find secured loans

Secured personal loans are most commonly provided by credit unions, but there are also banks and online lenders that offer them. In some cases, a lender might offer a secured personal loan if you can’t qualify for an unsecured loan.

What is an unsecured personal loan?

In contrast to a secured loan, an unsecured personal loan doesn’t require collateral to get approved. These loans typically charge higher interest rates to compensate the lender for the increased risk.

That said, you might still be able to get an interest rate in the single digits if you have great credit. “A high credit score can unlock loans with interest rates significantly lower than credit cards,” says Tayne.

What’s more, if you default on your payments, you don’t have to worry about losing your collateral — though the lender could resort to other methods to collect, which can include suing you as a last resort.

Qualifying for an unsecured personal loan

Most unsecured personal loan lenders require good to excellent credit. There are also some lenders that offer loans to borrowers with bad credit. However, if you have bad credit, you’ll likely end up with a higher interest rate, especially compared to a secured personal loan.

Lenders will also generally have minimum income and maximum debt-to-income (DTI) ratio requirements that you’ll need to meet, among other criteria. However, the specifics will vary by lender.

Tip: With some lenders, you can apply with a co-signer or co-borrower (also known as a joint applicant) to increase your chances of getting approved. This could also help you qualify for more favorable terms than you’d get on your own.

Other types of unsecured loans

Other types of unsecured loans include:

• Buy now, pay later (BNPL) loans.
• Payday loans.
• Peer-to-peer (P2P) loans.
• Student loans.
• Unsecured credit cards.
• Unsecured personal lines of credit.
• Unsecured small business loans.

Where to find unsecured loans

As with secured loans, you can find unsecured loans from a variety of lenders, including traditional banks, credit unions and online lenders. That said, unsecured personal loans are far more common than secured loans.

Secured vs. unsecured personal loans

Here’s a breakdown of some of the key details surrounding secured loans vs. unsecured loans:

When to choose a secured loan vs. an unsecured loan

For most people, an unsecured personal loan is likely the better choice when you need to borrow money as it doesn’t require risking valuable collateral. An unsecured loan can also be optimal if you have good to excellent credit and can qualify for the lowest interest rates, or if you need fast access to cash.

But there are some instances where it might make sense to opt for a secured loan instead. In particular, here are some scenarios where you should possibly consider a secured loan:

• You have poor credit and don’t want a high interest rate.
• You have an asset you can use as collateral.
• Your priority is to build credit.
• You want to borrow more than the maximum amount allowed with an unsecured loan.
• You’re not concerned about defaulting on your payments.
• You don’t need your savings anytime soon but don’t want to deplete your reserves.
• You don’t need money in the next day or two.

Ultimately, make sure to think carefully about your financial situation, needs and goals to determine the best course of action for you.