Secured vs. Unsecured Personal Loans: Which Is Right for You?

What Is a Secured Personal Loan?

A secured personal loan requires you to pledge an asset as collateral, such as a savings account, certificate of deposit, vehicle, or home equity. The lender can take that collateral if you default on the loan, which reduces the risk they take on and can result in more favorable terms for you.

Because the loan is backed by something of value, lenders may be willing to approve borrowers who do not have strong credit. Secured loans can also offer larger amounts and lower interest rates, but the possibility of losing your property is a serious consideration.

• Requires collateral
• Often has lower interest rates
• May allow higher borrowing limits
• Credit requirements can be more flexible

Sources: Consumer Financial Protection Bureau, Experian, Bankrate, LendingTree

What Is an Unsecured Personal Loan?

An unsecured personal loan does not require any collateral. The lender decides whether to approve you based on your creditworthiness, income, and other financial factors, so they have no claim on your property if you fall behind.

Since there is no asset to protect the lender, unsecured loans generally come with higher interest rates than secured ones. They may also offer smaller loan amounts and require a stronger credit history, but they often can be funded faster because there is no collateral to appraise.

• Does not require collateral
• Typically has higher interest rates
• Often has lower borrowing limits
• Approval can be quicker, sometimes same-day

Sources: Consumer Financial Protection Bureau, Experian, Bankrate, TransUnion

Comparison Criteria: Interest Rates, Loan Amounts, and Terms

When you compare secured and unsecured personal loans, the main points to examine are interest rates, loan amounts, repayment terms, approval speed, and what happens if you cannot repay. The table below brings these differences together.

Sources: Consumer Financial Protection Bureau, Experian, Bankrate, LendingTree, TransUnion

Collateral Requirements

Lenders of secured personal loans commonly accept collateral such as savings accounts, certificates of deposit, vehicles, or home equity. The value of what you offer can help determine the amount you can borrow and the interest rate you receive.

If you do not repay a secured loan, the lender may take the collateral to recover what you owe. This means you could lose your car or the money in your savings account. Defaulting on an unsecured loan does not put any specific asset at risk, but it can lead to debt collection, a lawsuit, and a significant drop in your credit score.

• Common collateral: savings accounts, certificates of deposit, vehicles, home equity
• Defaulting on a secured loan may result in loss of the collateral
• Defaulting on an unsecured loan can lead to collection efforts and credit damage

Sources: Consumer Financial Protection Bureau, Experian, Bankrate, LendingTree, TransUnion

Pros and Cons of Secured Loans

Secured loans can be helpful if you want to keep payments lower or borrow more money. But the trade-off is placing an asset you own at risk.

• Pros: Interest rates are generally lower than for unsecured loans.
• Pros: Larger loan amounts may be possible, depending on collateral value.
• Pros: Credit requirements may be less strict, making approval more likely for some borrowers.
• Cons: Your collateral can be taken if you default.
• Cons: The approval process can be slower because the lender must verify the collateral.

Sources: Consumer Financial Protection Bureau, Experian, Bankrate, TransUnion

Pros and Cons of Unsecured Loans

Unsecured loans are often attractive because they do not put your property on the line. However, the convenience comes with different kinds of costs and requirements.

• Pros: No collateral means you do not risk losing a specific asset.
• Pros: Approval can be faster, sometimes with same-day funding.
• Pros: The application process is usually simpler because there is no asset to evaluate.
• Cons: Interest rates are generally higher than for secured loans.
• Cons: You typically need good or excellent credit to qualify for the best rates.
• Cons: Borrowing limits may be lower, although well-qualified applicants might receive larger offers.

Sources: Experian, Bankrate, TransUnion

How to Choose the Right Type

The best choice depends on your financial circumstances, including whether you have an asset you are willing to use as security and how strong your credit history is. Keep in mind what matters most to you, such as the interest rate, the speed of funding, or the risk of losing property.

• If you have acceptable collateral and want to pursue lower rates or a larger loan, a secured loan could be a good option, especially if your credit is not perfect.
• If you have good credit and prefer not to risk any of your assets, an unsecured loan may be more suitable, even with a higher rate.
• Consider how quickly you need the money. Unsecured loans tend to fund faster because there is no collateral to evaluate.
• Look at the repayment period. Longer terms on a secured loan may reduce your monthly payment, but you will have the collateral at risk for a longer time.

Sources: Experian, Bankrate, TransUnion

Decision Matrix: Choosing Between Secured and Unsecured

The following table summarizes the most important points to weigh. Use it as a starting point for your own comparison, and keep in mind that lender offers can vary.

Sources: Consumer Financial Protection Bureau, Experian, Bankrate, TransUnion