Secured vs. Unsecured Loan: Which Should You Choose?

A secured loan is usually the better choice if you have collateral and want lower interest rates, while an unsecured loan may make more sense if you don't want to risk an asset or need funding without tying it to property. The right option depends on your credit profile, borrowing needs and tolerance for risk.

Here's what you need to know about the differences between secured and unsecured loans.

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Key Takeaways

• The main difference between secured and unsecured loans is collateral. Secured loans require an asset like a home or car as backup, while unsecured loans rely solely on your creditworthiness.

• Secured loans offer lower rates and higher borrowing limits. Because lenders have collateral to fall back on, they can offer rates as low as 4% to 7% compared to 10% to 36% for unsecured loans.

• Unsecured loans are faster to fund and don't put your assets at risk. They typically process within a few business days since there is no collateral to appraise or verify.

• Defaulting on either type has serious consequences. With a secured loan you risk losing your collateral, while defaulting on an unsecured loan can lead to collections, legal action and lasting credit damage.

Summary generated by AI, verified by MoneyLion editors

What Is a Secured Loan?

You can secure a loan with an asset like a house, a car or a savings account. 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?

Unsecured loans don't require assets. 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 Unsecured Loans

What Is the Difference Between Secured and Unsecured Loans?

Besides the need for collateral, unsecured and secured loans can have different loan terms, interest rates and loan amounts.

Collateral

• Secured loans require assets as backup.

• 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.

• 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 of 4% to 7%.

• Unsecured loans can carry rates of roughly 10% to 36% because lenders take on more risk.

• This difference can translate to thousands of dollars saved over the life of the loan, especially for larger borrowing amounts.

Loan Amount

• Secured loans can reach into the millions for mortgages or up to 85% of your home’s equity. 

• 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. 

Find Out: How Much of a Personal Loan Can I Get?

Risk Level

• 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. 

• 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.

• 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.

• Unsecured loans usually range from 2 to 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. Many can be approved and funded within a few business days.

• A secured loan might require appraisals and title searches that can take weeks.

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.

• 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: a secured or an 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 a 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 credit. 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.

Key Terms

• Collateral: An asset such as a home, car or savings account pledged to secure a loan. If the borrower defaults, the lender has the legal right to seize the collateral to recover the outstanding balance.

• Secured loan: A loan backed by collateral. Common examples include mortgages and auto loans, where the purchased property itself serves as the collateral. Secured loans typically offer lower rates and longer repayment terms than unsecured loans.

• Unsecured loan: A loan that requires no collateral. Approval is based on credit score, income and debt-to-income ratio. Personal loans and credit cards are the most common examples.

• Default: Failure to repay a loan according to its agreed terms. Defaulting on a secured loan can result in the lender seizing your collateral, while defaulting on an unsecured loan can trigger collections, lawsuits and significant credit score damage.

Summary generated by AI, verified by MoneyLion editors

Sources

• MyCreditUnion.gov. "Consumer Loans & Credit Cards."

• Consumer Financial Protection Bureau. 2024. "Do I have to put up collateral for a payday loan?"