The Bankrate promise
At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Here's an explanation for .
When shopping for personal loans, borrowers will find that there are two main types of loans — secured personal loans and unsecured personal loans. A secured personal loan is backed by collateral, meaning something you own can be taken by the bank if you do not pay the loan under the agreed terms. An unsecured personal loan does not require any form of collateral for you to qualify.
Both types of personal loans have their pros and cons. With the growth of Fintech companies, unsecured personal loan usage is growing because borrowers have access to more options for lending.
With so many lending options available, deciding the best option for you can be tricky. Gathering the facts about secured and unsecured personal loans is a great first step in obtaining a personal loan.
Secured loans are often used for purchases that need larger loan amounts — like a home loan or an auto loan. Lenders like secured loans because they are taking less risk. Borrowers like secured loans because you can typically get lower interest rates. You can get rates to start as low as three percent APR with good credit.
Common types of secured loans
Here are a few examples:
- Mortgages: Mortgages require the house being purchased to be used as collateral. If the borrower is unable to repay the loan, the house can go into foreclosure and the borrower can lose the house.
- Secured credit cards: For those with limited credit history, a secured credit card can offer the chance to build your credit score. The credit card requires a cash deposit to serve as collateral, typically between $200 and $500. The amount you deposit will be your credit limit. If a monthly payment is not made, the money is taken from the cash held as collateral.
- Vehicle loans: These types of loans are available for cars, trucks, motorcycles and boats. The vehicle is used as collateral. Not repaying the loan can result in the vehicle being repossessed by the lender as repayment.
Where to get a secured loan
Several financial institutions offer secured loans, such as banks, credit unions and online lenders.
- Less stringent eligibility requirements
- Often has lower interest rates than unsecured loans
- Secured loans usually have higher borrowing limits than unsecured loans
- Collateral can be taken if you default on the loan
- Failure to repay the loan as agree can damage your credit
Unsecured loans don’t require collateral, but failing to pay on time can result in a bad credit score. Your debt can also be sent to a collection agency if you don’t pay off your loan within the terms of the lender.
Common types of unsecured loans
Here are a few examples of unsecured loans:
- Personal loans: These are often called “term loans” or “installment loans,” because they have a fixed period of time for repayment with monthly payments made in equal amounts.
- Revolving loans: These are loans that the borrower can use and repay repeatedly. Credit cards and personal lines of credit are examples of this type.
- Student loans: Loans for college are usually made out to students with few assets and little credit history, so they don’t require collateral.
Where to get an unsecured loan
You can get an unsecured loan from a bank, credit union or online lender.
- A lender can’t take your assets if you default on the loan, at least without a court’s permission
- No collateral required
- Unsecured loans usually have lower borrowing limits than secured loans
- Often has higher rates than secured loans
- May have a tough time qualifying with bad credit
- Defaulting on the loan can cause serious credit damage
What are the key differences between secured and unsecured loans?
The choice between an unsecured and secured loan impacts your approval chances, your rates and fees and the need for collateral.
The primary difference between secured and unsecured loans comes down to collateral. With a secured loan, you give the lender the right to seize the asset you use as collateral should you fail to repay the loan. With an unsecured loan, no assets are required — though you’ll still face credit implications if you default on your loan payments.
Lenders take on less risk with secured loans since the borrower has more incentive to repay the loan. Because of this, interest rates are typically much lower. However, with a good credit score you will get more favorable rates for either type of loan. A good credit score is typically considered anything 670 or higher.
Due to the financial approval requirements, secured loans tend to have higher borrowing limits, giving you access to more money.
How you can use the money
Most unsecured loans have few restrictions on how the money will be used. As long as the loan proceeds aren’t going toward gambling, buying securities, illegal activities or, in some cases, college expenses, you’re free to spend the money as you please.
Lenders tend to approve secured personal loans for specific purposes, like buying a boat or a recreational vehicle. With these types of loans, your options may be more limited.
Requirements to qualify
If you have bad credit, some lenders may be unwilling to lend you an unsecured loan since they perceive bad-credit borrowers as riskier. With secured loans, on the other hand, credit requirements may be lower since the borrower takes on additional risk.
Which is better for you
Which loan type is better depends on your need, financial history and credit score. Since secured loans will often have lower interest rates and higher borrowing limits, they may be the best option if you’re confident about being able to make timely payments. Secured loans are also usually the best choice if you have bad credit.
That said, an unsecured loan may be the best choice if you don’t want to place your assets at risk. Interest rates may be slightly higher, but they could still be competitive if you have good credit.
The bottom line
Both secured and unsecured personal loans have distinctive benefits and drawbacks. Secured personal loans often come with lower interest rates, but your collateral can be seized if you default. With an unsecured personal loan, a lender can’t take your collateral without a court’s permission. But you may have to pay a higher interest rate.
Whether you decide to take out a secured or unsecured personal loan, make sure to shop around with multiple lenders and compare their rates and fees to ensure that you’re getting the best rates for your financial need.