Personal loans offer quick access to funds for debt consolidation, medical bills, home improvements, major purchases, and more. With flexible use options and numerous lenders available, they're a popular financing choice for many borrowers.
When choosing a personal loan, you'll face one key decision: secured or unsecured. Secured loans require collateral like your car or savings account, while unsecured loans are based solely on your creditworthiness. Each option offers distinct pros and cons that can impact your borrowing experience.
This guide explains the differences between secured and unsecured personal loans to help you choose the right option for your financial needs.
What is a Secured Personal Loan?
A secured personal loan is a loan that requires collateral to guarantee repayment. You must put up an asset—such as cash in a savings account, a vehicle, your home, investments, or valuable items like jewelry—that the lender can claim if you fail to repay the loan. The specific collateral options depend on your lender's requirements.
Using collateral makes it easier to qualify for a personal loan because lenders view secured loans as lower risk. However, you're putting your property at stake—if you default on payments, the lender can seize your collateral to recover their losses.
“A secured loan is a loan that is backed by collateral/property. So, in the case a borrower was to default, they would give up rights to said property,” says Adem Selita, CEO and co-founder of The Debt Relief Company.
Pros of Secured Loans
- Easier qualification: Collateral reduces lender risk, making approval more likely even with poor credit.
- Lower interest rates: Secured loans typically offer better APRs than unsecured loans due to reduced lender risk.
- Higher borrowing limits: Collateral may allow you to borrow larger amounts than unsecured loans permit.
- Credit-building opportunity: Making timely payments can help improve your credit score over time.
"Secured loans [are] viewed … favorably in terms of credit, and they're less risky for lenders since the loan is backed by a guarantee of property. Since they are inherently less risky, they also come with the benefit of better interest rates," says Selita.
Cons of Secured Personal Loans
- Risk of losing collateral: Defaulting means the lender can seize your car, savings, or whatever asset secures the loan.
- Potential credit damage: Missing payments can further harm an already poor credit score.
- Limited lender options: Fewer mainstream lenders offer secured personal loans compared to unsecured options.
- Longer approval process: Evaluating and appraising collateral extends the application timeline.
What is an Unsecured Personal Loan?
An unsecured personal loan is a loan that doesn't require collateral. You qualify based solely on your creditworthiness—including your credit score, income, and debt-to-income ratio—rather than pledging an asset as security.
These loans are typically harder to qualify for since lenders have no collateral to claim if you default, so they often require stronger credit. However, some lenders do work with borrowers who have fair or poor credit scores.
"Unsecured loans … are not backed by collateral and fund faster but at a higher interest cost and tighter credit terms," says Randall Yates, co-founder of VA Loan Network.
Pros of Unsecured Personal Loans
- No collateral at risk: Your assets are safe since nothing secures the loan—you can't lose your car, home, or savings if you default.
- Wide lender availability: Most banks, credit unions, and online lenders offer unsecured personal loans, giving you plenty of options.
- Faster approval: Without collateral to evaluate and appraise, lenders can process applications and fund loans more quickly.
Cons of Unsecured Personal Loans
- Stricter credit requirements: Lenders demand higher credit scores and stronger financial profiles since they have no collateral protection.
- Higher interest rates: Expect to pay more in interest compared to secured loans due to increased lender risk.
- Lower borrowing limits: Maximum loan amounts are typically smaller since lenders are less comfortable lending large sums without collateral.
Key Differences Between Secured and Unsecured Loans
| Feature | Secured Loans | Unsecured Loans |
|---|---|---|
| Collateral required | Yes (car, savings, home, etc.) | No |
| Interest rates | Lower (typically 3-12%) | Higher (6-36%) |
| Credit requirements | More flexible, may accept scores as low as 500-580 | Stricter, typically 580-650+ credit score |
| Loan amounts | $1,000-$100,000+ (up to 80-90% of collateral value) | $1,000-$100,000 (based on income and credit) |
| Approval time | 3-10 business days (collateral evaluation required) | 1-7 business days, sometimes same day |
| Risk to borrower | Can lose collateral if you default | No asset loss, but credit damage |
| Debt-to-income ratio | Up to 50% DTI may be acceptable | Typically max 36-43% DTI |
| Lender availability | Limited (banks, credit unions, some online lenders) | Widely available (most banks, credit unions, online lenders) |
Which Type of Loan is Right for You?
Choose an unsecured personal loan if you:
- Have good to excellent credit: FICO score 670+ and can qualify for competitive rates without collateral
- Want to protect your assets: Avoid the risk of losing your car, home, or savings if you can't repay
- Need funds quickly: Can accept slightly higher interest rates for faster approval
- Don't have suitable collateral: Prefer not to tie assets to your loan
Choose a secured personal loan if you:
- Have fair to poor credit: FICO score below 670 and need collateral to improve your approval odds
- Want the lowest possible interest rate: Have valuable assets like a car, savings account, or home equity to pledge
- Need to borrow a large amount: Your collateral can support a higher loan limit
- Have stable income and confidence: In your ability to make all payments on time
"Secured loans are suitable when you need a lot of money and have collateral to provide; unsecured loans are available for smaller, short-term requirements or if collateral is not available," says Yates.
How to Apply for a Secured or Unsecured Loan
Use the following steps to apply for a secured or unsecured personal loan:
- Check your credit score: Know your credit score before applying since lenders have minimum requirements (often listed on their websites). Consider improving your score first if you have time, as it can help you qualify for better rates.
- Determine your loan amount: Calculate exactly how much you need to borrow. This helps you find lenders that offer your desired amount and ensures you don't borrow more than necessary.
- Choose your collateral: For secured loans, identify which asset you'll use as collateral. Verify that your chosen lender accepts your specific type of collateral (car, savings account, etc.).
- Shop and compare lenders: Research APR ranges, loan amounts, and repayment terms online. Use prequalification tools or comparison sites to find the best offers without affecting your credit score.
- Submit your application: Apply online, by phone, or in-person with your chosen lender. Provide required documentation including income verification, employment details, and financial information.
- Review the loan decision: If approved, carefully review the loan terms before accepting. If denied, the lender must explain why or tell you how to access the denial reasons.
- Receive your funds: Once you accept the offer, funds are typically deposited directly into your account within 1-2 business days, though some lenders offer same-day funding.
Conclusion
Choosing between secured and unsecured personal loans depends on your credit score, risk tolerance, and financial goals. Secured loans offer lower rates and easier approval but put your assets at risk, while unsecured loans provide faster funding and asset protection at higher interest rates.
Consider your specific situation and compare offers from multiple lenders to find the best fit for your needs.
Frequently Asked Questions
What credit score do I need for an unsecured personal loan?
Most lenders require a minimum credit score of 580-650 for unsecured personal loans, though borrowers with scores of 670+ typically qualify for the best rates and terms.
Can I lose my collateral if I make late payments on a secured loan?
Yes, if you default on a secured loan (typically after 90+ days of missed payments), the lender can seize your collateral to recover their losses. However, occasional late payments usually result in fees rather than immediate asset seizure.
Which loan type offers better interest rates?
Secured loans typically offer lower interest rates (3-12%) compared to unsecured loans (6-36%) because the collateral reduces the lender's risk. Your actual rate depends on your credit score, income, and other factors.
