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

If you’re in the market for a personal loan, you’ll have two options to choose from: secured and unsecured loans. While most personal loans are unsecured, you can also get a secured loan by offering collateral.

When comparing secured vs. unsecured personal loans, it’s important to understand the key differences, such as the need for collateral, interest rates, and the pros and cons of both.

What Is a Secured Personal Loan?

A secured personal loan is backed by collateral. A collateral is an asset that you can pledge to the lender. If you don’t repay the loan, the lender can seize the collateral to recover the money you owe. Other examples of secured debt include auto loans, mortgages, home equity loans, and HELOCs.

Not all lenders offer secured personal loans. However, some will allow you to pledge your car, certificate of deposit, or savings account to get the loan. This is usually a good option if you have bad credit and can’t qualify for an unsecured loan. However, they can also be risky since you may lose your assets if you default.

What Is an Unsecured Personal Loan?

Most personal loans are unsecured and don’t require collateral. These loans are riskier for the lender because if you default, they lose the money you owe. For this reason, unsecured personal loans can be more expensive than secured personal loans. Credit cards and student loans are examples of unsecured debt.

Lenders will look at factors like your payment history, income, and credit score to assess your creditworthiness and qualify you for the loan. Unsecured loans are also harder to qualify for when compared to secured personal loans.  

Pros and Cons of Secured Personal Loans

Secured personal loans are generally less expensive than unsecured loans, but they also come with a few risks that you should be aware of.

Pros

• Lower interest rate compared to unsecured personal loans
• Easier to qualify for even if you don’t have good or excellent credit (750 or more)
• You may be able to borrow a larger loan amount if you can offer collateral  

Cons

• With a larger loan amount and longer repayment term, you may pay more in interest over the life of the loan
• You risk losing your asset if you default on the loan
• Not all lenders offer secured personal loans

Pros and Cons of Unsecured Personal Loans

Unsecured personal loans are easily accessible, but they can cost more than secured personal loans. Weigh the pros and cons before you make a decision.

Pros 

• You don’t risk losing your assets if you can’t repay the loan
• Easily available at banks, credit unions, and online lending platforms
• Quick application process and approvals

Cons

• Higher interest rates compared to secured personal loans
• Harder to qualify if you don’t have a good credit score

Key Differences Between Secured Vs. Unsecured Personal Loan

When comparing secured vs. unsecured personal loans, pay particular attention to these key differences.

Collateral

You don’t need collateral for an unsecured personal loan. With a secured loan, you need collateral, and the lender can seize it if you fail to repay the money you borrowed. Although unsecured personal loans are less risky, your credit score can still suffer if you miss payments.

Interest rates

The interest rates for unsecured personal loans are typically higher because they’re riskier for the lender. The current average unsecured personal loan interest rate is 12.38%. Secured loan rates are lower than that.

Loan Amounts

Secured personal loans tend to have higher maximum loan amounts. Keep in mind that some of the best unsecured personal loans for debt consolidation, home improvements, and other purposes also allow you to borrow up to $100,000. However, these loans are usually harder to qualify for.

Qualification Requirements

Secured loans have lower credit requirements. The collateral you pledge offsets the lender’s risk, so they’re more willing to lend to those with lower credit scores.

The minimum credit score requirements for unsecured personal loans are usually higher. However, many lenders also work with borrowers with bad credit.

What Are the Requirements for Secured and Unsecured Personal Loans?

Here’s what you should know about the qualification requirements for secured and unsecured personal loans:

• Secured Personal Loans: Lenders will look at the value of the collateral, your debt-to-income (DTI) ratio, income, and credit score to approve you for the loan. You’ll usually be able to qualify even with a lower credit score.
• Unsecured Personal Loans: Most lenders require a minimum credit score of 600 for an unsecured personal loan. They’ll also check your DTI ratio, which should ideally be lower than 36%. However, some lenders have less stringent qualification requirements.

How To Choose Between Secured and Unsecured Personal Loans?

Secured and unsecured personal loans are both good options for debt consolidation, home improvement, and emergency expenses. Usually, a secured personal loan is a better option if:

• You have a low credit score that doesn’t allow you to qualify for an unsecured loan.
• You have collateral that lenders are willing to accept.
• You want to borrow a larger loan amount.
• You’re certain you’ll be able to repay the loan.

An unsecured personal loan is a better option if:

• You don’t want to risk losing your assets.
• You don’t want to borrow a large amount.
• You have a good credit score that allows you to qualify for a competitive interest rate.

How To Get a Secured and an Unsecured Personal Loan?

The application process for secured and unsecured personal loans is quite similar and usually quick. Here are the steps you’ll usually need to follow:

1. Check your credit score to determine what type of loan you’ll be able to qualify for.
2. Determine the amount you need to borrow and evaluate your budget to ensure you’ll be able to afford the monthly payments.
3. Make a list of lenders that offer the type of loan you want to borrow. You can get personal loans from online lenders, banks, and credit unions.
4. Prequalify for a personal loan to see what type of loan terms and rates you qualify for.
5. Select the right type of personal loan based on your financial situation, borrowing limits, qualifying requirements, and the best rates you’re eligible for.
6. Gather your documents, such as tax returns, W-2s, pay stubs, bank statements, proof of residence, and a government-issued photo ID. If you’re borrowing a secured personal loan, you’ll also need to provide documents related to the asset.
7. Fill out and submit the loan application in person or online.
8. Review and sign the loan agreement. In most cases, you’ll receive the funds in your bank account within one or two business days.

Should I Get a Secured or an Unsecured Personal Loan?

Secured and unsecured personal loans share a lot of similarities, but the need for collateral is the key difference. You’ll need to shop around, prequalify, and compare rates from multiple loan issuers to determine which type of loan offers you the lowest rates.

If you have an asset like a CD or savings account, you may be able to qualify for a lower rate with a secured personal loan. However, keep in mind that you risk losing the asset if you fail to make timely loan payments.

If you don’t want to risk losing your assets or have a strong credit profile, you may be able to qualify for a good interest rate even with an unsecured personal loan.

If personal loans are not right for you, keep in mind that there are other borrowing options available. Consider home equity loans, personal lines of credit, home equity lines of credit (HELOCs), unsecured and secured credit cards, and other loan options based on your financial situation.