Personal Loans

Secured vs. Unsecured Loans: Key Differences and When They’re Best for You

Secured loans require collateral, while unsecured loans don’t. Understanding the difference between secured and unsecured loans goes beyond that simple explanation, though, as it can impact everything from your eligibility to your interest rate, loan amount and loan term. As you compare secured versus unsecured loans, you can use this guide to arm yourself with the knowledge you need to make the right loan choice.

Key takeaways

  • Types of secured loans — which require collateral — include mortgages, auto loans, secured personal loans, home equity loans and pawn shop loans.
  • Types of unsecured loans include credit cards, lines of credit, unsecured personal loans and federal and private student loans.
  • Secured loans can be easier to qualify for if you have less-than-perfect credit, and they often come with lower interest rates and larger loan amounts because of the collateral.
  • When an asset is used as loan collateral, you risk losing it if you can’t make your loan payments.
  • Unsecured loans don’t require collateral, so your eligibility is usually dependent on your credit history and other financial information.
  • Unsecured loans, which often require good credit, can come with higher interest rates because they’re riskier for lenders.

What is a secured loan?

A secured loan is backed by collateral provided by the borrower. Collateral is an asset, such as a house, car, land, savings account or investment account, that guarantees repayment. If you fail to repay your secured debt, the lender can seize your collateral to recoup its losses.

The biggest drawback of a secured loan is that you risk losing your collateral if you’re unable to make your payments. On the other hand, these collateral-backed loans present less risk to the lender. Because of this, they tend to be easier to qualify for, even if you have less-than-stellar credit. When comparing secured versus unsecured loans, you may notice that secured loans usually come with lower interest rates, larger loan amounts and longer loan terms.

Types of secured loans
Loan type What it is used for Collateral
Secured personal loan Consolidating debt, paying medical bills or various other purposes Savings account, investment account, car title
Mortgage Purchasing a home Home
Home equity loan/home equity line of credit (HELOC) Paying for expenses by borrowing money against the equity you have in your home Home
Boat and specialty vehicle loans Purchasing a boat or specialty vehicle, such as a recreational vehicle (RV), motorcycle, ATV or Jet Ski Boat or specialty vehicle title
Auto loan Purchasing a vehicle Vehicle
Auto title loan Paying bills, managing debt or various other purposes Vehicle title
Pawn shop loan Paying quickly for short-term needs Valuable item
Secured business loan Expanding operations, consolidating business debt or various other purposes Property, equipment, inventory, invoices, investments and more
Secured credit card Paying for purchases backed by a security deposit (generally from $50 to $300); can help build credit Security deposit

How the application process works

The main difference with the application process for secured loans is that you may be asked to provide additional information regarding the collateral. Here are steps you can follow for secured loans:

  • Check to see if you prequalify. Fill out an online form with LendingTree to be matched with up to five personal loan lender, depending on your creditworthiness.
  • Have your personal and contact information ready. This includes your Social Security number, employment and income information and a government-issued form of identification.
  • Prepare documents related to your collateral. If you’re offering up an asset for a secured loan, you’ll likely be asked to provide documentation related to that asset.
  • Complete the application online or in person. Some institutions might require you to apply at a branch, while others are fully online.
  • Wait for your loan decision. Some institutions offer immediate decisions, while others might take several days to process your application.
  • Provide additional documentation. If you’re approved, you may be asked to verify the information you’ve provided, as well as the collateral you plan to use.
  • Sign the necessary closing documents. If you accept the loan offer, you’ll need to sign to be given access to your funds.

What is an unsecured loan?

An unsecured loan isn’t secured with any form of collateral. Rather than an asset to mitigate risk, lenders offering unsecured loans rely on creditworthiness, income and debt-to-income (DTI) ratio to determine whether you’re a good candidate for a personal loan. This can make unsecured loans difficult to get if you have bad credit. For potential borrowers with good credit, unsecured loans might present a simpler application process.

Unsecured loans are generally considered safer since the lender can’t seize your property as soon as you fall behind on your loan payments. However, regardless of whether you get a secured or unsecured loan, creditors can take action against you to recoup their losses if you don’t pay. Debt collectors can sue you for failure to repay unsecured debt. If granted a court order, they can garnish your paycheck or take money from your bank account.

The interest rates on unsecured loans may be higher, the loan amounts may be smaller and the loan terms may be shorter since there’s no collateral backing the loan.

Types of unsecured loans
Loan type What it is used for
Personal loan Remodeling a home, paying for a wedding or dream vacation or various other purposes
Debt consolidation loan Paying off existing debt, such as credit card or medical debt, with the goal of consolidating multiple balances under one loan
Student loan Paying for education costs
Personal line of credit Making a purchase or covering an emergency expense — up to your limit; funds are replenished as the line is paid off
Credit card Borrowing money — and possibly owing interest — to make purchases up to your limit

How the application process works

The application process for an unsecured loan is often easier and faster since you won’t be required to provide and verify a form of collateral.

  • Check your free credit score. Because credit plays a larger role in qualifying for an unsecured loan, you’ll want to know where you stand before filling out any applications.
  • Compare quotes from different lenders. Get an idea of what loans you might qualify for. Keep in mind that the resulting loan offers aren’t guaranteed.
  • Prepare your documents. Most lenders will want personal and contact information, such as your Social Security number and address, as well as employment, income and debt information, which might include pay stubs and proof of debt.
  • Complete the loan application. This is done online for online lenders. Most banks and credit unions offer the option of completing your loan application online or in person.
  • Review and accept your loan offer. If you’re approved, you’ll want to double-check the terms of your loan and make sure you can afford the monthly payments before accepting any offer.
  • Sign your loan agreement and receive your funds. Depending on the lender and loan type, your loan funds might be deposited into your bank account, sent directly to the creditor you’re paying off or sent to you as a check.

Is a secured or unsecured loan best for me?

If you don’t have assets to provide as collateral, an unsecured loan could be your only option. But if you have fair or bad credit and you have an asset that could be used as collateral, a secured loan would likely be easier to qualify for. However, you’ll need to decide whether you’re willing to put that asset at risk to secure a loan.

Consider a secured loan if you … Consider an unsecured loan if you …
  • Have fair or bad credit
  • Have an asset to provide as collateral
  • Want the lowest interest rate possible
  • Want a larger loan amount or longer loan term
  • Have good or excellent credit
  • Don’t have an asset to provide as collateral
  • Don’t need a larger loan amount

You’ll also want to think about the type of loan you want. You might be able to access more funds if you opt for a secured loan, and you might also save money by securing your loan with collateral.

Many lenders only offer up to $50,000 for unsecured personal loans, while secured personal loans can range up to $1 million. The APR difference between secured and unsecured loans can range from a few percentage points to more than 10 percentage points. And while unsecured loans typically come with terms of 12 months to 60 or 84 months, some secured loans come with loan terms of up to 144 months.

 

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