Secured Vs Unsecured Personal Loans: What’s the Difference?

If you’ve done any amount of digging into the prospect of taking out a personal loan, there’s a chance you’ve come across the terms “secured” and “unsecured” with regard to borrowing money. But exactly what exactly do these terms mean?

If you’re curious about the definitions of these terms and the difference between secured and unsecured loans, look no further. This comparison of the two will spell out everything you need to know about secured vs unsecured loans.

What’s The Difference Between Secured Loans and Unsecured Loans?

The word “secure” can mean several different things depending on the context in which it’s used. Shelves can be secured to walls so they don’t fall, inventors can secure patents to protect their creations, and a baby can feel secure in the arms of her mother. When it comes to personal loans, though, “secure” simply means that a loan is backed up by an asset, such as a vehicle. Borrowers use such assets, considered collateral in these arrangements, and give lenders the legal right to take possession of the assets if the borrower fails to meet the repayment terms. This is known as defaulting on a loan.

So what is the difference between secured and unsecured loans? Simply put, secured loans require assets as collateral and unsecured loans do not. That’s all there is to it. And if you’re also interested in finding out what is an unsecured line of credit, it’s essentially the same thing as an unsecured loan except you can borrow against the amount over and over again as long as you continue to make monthly payments on time.

How Can You Compare

Now that the definitions are out of the way, you might be wondering how does a secured loan work and if they’re a good way to go. While secured loans used to be quite commonplace during earlier eras of the banking industry, these days they’re mostly reserved for individuals who can’t get approved for unsecured loans.

Secured loans are also offered to people seeking to borrow an amount that outweighs their creditworthiness. Most borrowers with average or above-average credit scores tend to gain approval for loans without having to put up any collateral. That’s usually a more convenient option for all parties involved, although borrowers who take out secured loans can sometimes save money compared to an unsecured arrangement.

For the most part, however, when it comes to how secured loans compare to their unsecured counterparts, most people prefer to choose unsecured loans if given the option.

What Types of Assets Are Used for Secured Loans

Different lenders have different requirements insofar as what they’ll accept as a form of collateral. Generally speaking, though, most loan issuers will accept automobiles, boats, jewelry, motorcycles, real estate, and certificates of deposit as long as the value of your collateral is at least equal to the sum of money you’re seeking to borrow.

Secured Vs Unsecured Loans

To help you get an even better understanding regarding the differences between secured and unsecured loans, here’s look at the pros and cons of each.

Secured Loans — Pros

  • Initial interest rates with secured loans are likely to be lower than they would be with unsecured loans for the same amount. This is because the collateral reduces the amount of risk for the lender, allowing them to offer reduced rates. Likewise, the total amount of money you’d be eligible to borrow with a secured loan could be higher than that of an unsecured loan for the same reason.

Secured Loans — Cons

  • The primary drawback of taking out a secured loan is that you stand to lose your collateral if you miss a payment or otherwise default on your loan. This could turn your life upside-down depending on what type of asset you used. Also, secured personal loans aren’t as common as unsecured loans, so it might take you longer to find a lender that will work with you.

    » MORE: Where to Find Secured Loans

Unsecured Loans — Pros

  • Unsecured loans are easy to apply for, and if you get approved you could have your money as soon as the next day. And, the best part is, you don’t need to put any of your personal property on the line in order to get your loan fulfilled.

Unsecured Loans — Cons

  • With unsecured loans, you can expect to pay a higher interest rate than if you chose to deal with a lender of secured loans. Also, the total amount of money you’d be approved for with an unsecured loan would typically be lower than the sum you’d be permitted to borrow with a secured loan.

    » MORE: Best Unsecured Personal Loans Of 2019

Cost (Interest Rates)

Many inexperienced borrowers may wonder, is the interest rate higher on a secured or unsecured loan? And while there’s no hard-and-fast rule that all lenders abide by, a secured loan will often be accompanied by a lower interest rate than an unsecured loan. Depending upon a number of factors, though, including the length and quality of your credit history, the actual rates offered to you could vary wildly from one lender to another.

Example of a Secured Loan

Here’s an example of a secured loan: Say you want to buy a car for $10,000, but you don’t have the cash on hand, nor do you have strong enough credit to qualify for an unsecured loan in that amount. You could then find a lender that offers unsecured loans, and you could offer the car itself as collateral. If you get approved, you’ll get your $10,000 to buy the car, but if you miss a monthly payment on the loan, the lender has the legal right to come and claim your new set of wheels.

Risks of a Secured Loan

You could be risking a lot by taking out a secured loan, but only if the asset you use as collateral is essential to your day-to-day life. For example, you wouldn’t want to use your car as collateral if you need it to get to work. That’s because if you happen to miss a payment on your loan, the lender could repossess your car, leaving you with no way to commute to your place of employment.

What Type of Loan Is Best for You?

Depending on your credit history and how much money you’re interested in borrowing, a secured loan might make more sense for you — or it could be the other way around. If you manage to get approved for an unsecured loan for the amount you seek, that’s usually preferable than putting up a valuable asset as collateral. Yet if you’ve made some mistakes in the past with regard to how you’ve managed your credit, a secured loan may be the only option available to you.

Check Rates

The offers that appear on this site are from third party advertisers from which PrimeRates receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). PrimeRates strives to provide a wide array of offers, but our offers do not represent all financial services companies or products.

Scroll to Top