Secured vs. Unsecured Loan: Which Should You Choose?

A loan is secured when you tie it to a valuable asset. If you're trying to choose between a secured and unsecured loan, there are a lot of pros and cons to consider. Here's what you need to know:

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What Is a Secured Loan?

Imagine putting your house keys on the table as a promise to pay back the money you’ve borrowed – that’s essentially what a secured loan is. 

It’s a financial agreement where you offer something valuable you own (called collateral) – like your home, car or even expensive jewelry – as a guarantee to the lender. It’s like telling them, “I’m so serious about paying you back that I’m willing to risk losing my property if I can’t.”

This arrangement is why secured loans often come with relatively more attractive interest rates and higher borrowing limits. Lenders may be more willing to offer better terms because they have a safety net – if you stop making payments, they can legally take ownership of your collateral. 

Mortgages and car loans typically fall into this category.

Pros and Cons of Secured Loans

What Is an Unsecured Loan?

Think of an unsecured loan as borrowing money purely on your word and financial track record – no collateral required. Instead of putting up your car or house as a guarantee, lenders look at your credit score, income and financial history to decide if they trust you to pay back the loan.

The catch? Since lenders are taking on more risk without any collateral to fall back on, they typically charge higher interest rates to protect themselves. This is why you’ll often see personal loans, student loans and credit cards – typical unsecured loan examples – carrying steeper interest rates than mortgages or car loans.

The beauty of an unsecured loan is that you don’t have to put your assets at risk. However, don’t be fooled into thinking there are no consequences for defaulting – your credit score could take a serious hit, and lenders can still take legal action to collect their money. They just can’t automatically claim your property like they could with a secured loan.

Pros and Cons of Secured Loans

What Is the Difference Between Secured and Unsecured Loans?

The difference between a secured vs unsecured personal loan boils down to collateral requirements. Secured loans are essentially loans with collateral while unsecured ones are loans without collateral.

Collateral means you’re backing it up with something valuable, like your car or home, which helps lower the lender’s risk — and usually gets you a lower interest rate. 

On the flip side, an unsecured loan doesn’t require collateral, so approval is based on your creditworthiness and income. Think of it as borrowing on trust, but that trust often comes with higher interest rates!  

Collateral

Secured loans require assets as backup, while unsecured loans rely purely on your promise to repay. This is why secured loans are particularly common in real estate and auto financing, where the purchased item serves as its own collateral.

Credit Score

Unsecured loans typically need scores above 670, while secured loans might accept lower scores since they have collateral. This is why secured loans may be an attractive option for borrowers working to rebuild their credit.

Interest Rates

Secured loans usually offer lower rates (4 to 7%) compared to unsecured loans (10 to 36%), thanks to the reduced lender risk. This difference can translate to thousands of dollars saved over the life of the loan, especially for larger borrowing amounts.

Loan Amount

The borrowing potential between these loan types is striking. Secured loans can reach into the millions for mortgages or up to 85% of your home’s equity. 

While unsecured loans typically cap at more modest amounts — usually between $1,000 and $50,000 for personal loans, with some lenders offering up to $100,000 for highly qualified borrowers. 

Recommended: How Much of a Personal Loan Can I Get?

Risk Level

Both secured and unsecured loans carry significant consequences for defaulting. With secured loans, you risk losing your collateral, and if its value doesn’t cover the outstanding balance, you may still be responsible for the difference. This can lead to collection actions, lawsuits and damage to your credit score. 

Similarly, defaulting on an unsecured loan can result in the same penalties — legal action, collections and long-term credit damage. 

Always ensure you fully understand the terms and risks before borrowing.

Loan Purpose

Secured loans often have specific purposes (like buying a house), while unsecured loans tend to offer more flexibility. Such flexibility makes unsecured loans a popular option for debt consolidation, wedding expenses, or unexpected medical bills where no collateral is readily available.

Repayment Terms

Secured loans typically offer longer repayment periods, while unsecured loans usually range from 2-7 years. The longer terms for secured loans often result in lower monthly payments, though you may pay more in total interest over the life of the loan.

Approval Speed

Unsecured loans often process faster since there’s no collateral to evaluate. While a secured loan might require appraisals and title searches that can take weeks, many unsecured loans can be approved and funded within a few business days.

Recommended: How Long Does it Take to Get a Personal Loan?

Should You Get an Unsecured or Secured Loan?

Your perfect loan match depends on your financial situation, goals and comfort with risk. If you’ve got assets and want better rates, secured loans might be your jam. But if you value flexibility and quick approval, an unsecured loan could be your best bet.

FAQs

Are unsecured loans riskier than secured loans?

For lenders, unsecured loans are generally seen as riskier since there’s no collateral to back up the loan. For borrowers, secured loans are riskier since defaulting can mean losing your assets.

Is a personal loan secured or unsecured?

Personal loans are typically unsecured, meaning no collateral is needed. However, some personal loan lenders offer secured personal loans with lower rates if you provide collateral.

Is an auto loan secured or unsecured?

Most auto loans are secured loans, with the vehicle itself serving as collateral. This is why lenders can repossess your car if you default. 

Which is easier to get: secured or unsecured loan?

Secured loans are generally easier to qualify for, especially with lower credit scores, since the collateral reduces the lender’s risk. Learn more about the easiest loans to get here. 

Is a mortgage secured or unsecured loan?

A mortgage is a secured loan with your home as collateral. This security allows for lower interest rates and longer repayment terms.

Can you get an unsecured loan with no collateral?

Yes – unsecured loans are specifically designed to be borrowed without collateral. Approval is based on your creditworthiness and/or income level instead.

Are credit cards secured or unsecured?

Standard credit cards are unsecured. Secured credit cards require a security deposit and are typically used to help build. Learn more about secured vs unsecured credit cards here. 

Is a small business loan secured or unsecured?

Small business loans come in both types: secured loans might use business assets or property as collateral, while unsecured loans rely on business credit and revenue.