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

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If you’re looking to borrow money, you might need to decide between a secured loan and an unsecured loan. The main difference has to do with collateral: Secured loans require collateral, while unsecured loans don’t.

This difference, however, can affect 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.

Secured vs. unsecured loans: What’s the difference?

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.

When you start exploring your options for personal loans, you’ll likely come across two types: secured and unsecured. To borrow a secured loan, you’ll need to back it up with a piece of valuable collateral, such as your car or home. An auto loan and a mortgage are two common types of secured loans.

An unsecured loan, on the other hand, does not have any collateral backing it up. If you default on the loan, the lender can’t seize your asset, though you will experience other negative consequences. Some common types of unsecured loans are credit cards, student loans and unsecured personal loans.

Let’s take a deeper dive into how secured and unsecured loans work, including where to find them and the risks that come with failing to pay them back.

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.

Interest rates

Secured loans often have lower interest rates than unsecured loans, though the rate will vary by lender and loan type. The average auto loan rate, for example, was 9.46% APR in 2020, according to LendingTree data, while the average mortgage rate was 3.07% APR on a 30-year term (as of Jan. 24, 2022).

Repayment

You’ll typically pay back a secured loan in fixed, monthly installments over several years. A shorter term will mean higher monthly payments, while a longer term will involve smaller monthly payments. You might have a choice between fixed rates, which will stay the same over the life of your loan, and variable rates, which can fluctuate.

Risks

One major risk associated with secured loans is that a lender can seize your collateral if you default. If you don’t repay your auto loan, for example, a lender can repossess your car. If you fail to keep up with your mortgage, your home could go into foreclosure.

What’s more, your credit score will suffer if you miss payments. While you’ll have some time to get your loan back into good standing before a lender seizes your assets, you might see your credit score decline right away after a single missed payment.

Where to find secured loans

You can often find secured loans at a bank, credit union or online lender. The lender might want to appraise your collateral before issuing you the loan, though some will allow you to secure a loan with a savings account or certificate of deposit.

Types of secured loans

Loan typeWhat it is used forCollateral
Secured personal loanConsolidating debt, paying medical bills or various other purposesSavings account, investment account, car title
MortgagePurchasing a homeHome
Home equity loan/home equity line of credit (HELOC)Paying for expenses by borrowing money against the equity you have in your homeHome
Boat and specialty vehicle loansPurchasing a boat or specialty vehicle, such as a recreational vehicle (RV), motorcycle, ATV or Jet SkiBoat or specialty vehicle title
Auto loanPurchasing a vehicleVehicle
Auto title loanPaying bills, managing debt or various other purposesVehicle title
Pawn shop loanPaying quickly for short-term needsValuable item
Secured business loanExpanding operations, consolidating business debt or various other purposesProperty, equipment, inventory, invoices, investments and more
Secured credit cardPaying for purchases backed by a security deposit (generally from $50 to $300); can help build creditSecurity 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:

  1. Check to see if you prequalify. Fill out an online form with LendingTree to be matched with up to five personal loan lenders, depending on your creditworthiness.
  2. Have your personal and contact information ready. This includes your Social Security number, employment and income information and a form of government-issued identification.
  3. 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.
  4. Complete the application online or in person. Some institutions might require you to apply at a branch, while others are fully online.
  5. Wait for your loan decision. Some institutions offer immediate decisions, while others might take several days to process your application.
  6. 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.
  7. 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.

Interest rates

Interest rates on unsecured loans will vary depending on the lender you choose and your credit profile. Borrowers with the strongest credit tend to get offered the lowest rates. According to Q1 2021 LendingTree data, the average APR on unsecured personal loans for borrowers with a credit score between 660 and 679 was 24.74%, while the average APR for borrowers with a score of 720 or higher was 10.73%.

Repayment

As with secured loans, you’ll usually pay back an unsecured loan with fixed monthly payments over a certain number of years. You’ll also often get to choose between a fixed and variable rate.

Risks

Unlike with secured loans, you don’t need to worry about a bank seizing your assets if you fall behind on an unsecured loan. However, your credit will still get damaged if you miss payments. What’s more, your unpaid debt could be sent to collections, and you could be summoned to court. So while you won’t run the risk of having your car or house repossessed, you could still face severe consequences for falling behind on an unsecured loan.

Where to find unsecured loans

There are banks, credit unions and online lenders that offer unsecured loans, though not all banks offer this financing option. Online lenders tend to offer an easy, online application and fast funding. Plus, some will even let you prequalify for offers, so you can shop around and compare your rates with no impact on your credit score.

Types of unsecured loans

Loan typeWhat it is used for
Personal loanRemodeling a home, paying for a wedding or dream vacation or various other purposes
Debt consolidation loanPaying off existing debt, such as credit card or medical debt, with the goal of consolidating multiple balances under one loan
Student loanPaying for education costs
Personal line of creditMaking a purchase or covering an emergency expense — up to your limit; funds are replenished as the line is paid off
Credit cardBorrowing 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.

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.

What should you know before you borrow a loan?

Besides understanding the difference between secured and unsecured loans, there are a few other steps you should take before borrowing money.

First, make sure you can afford to pay back the loan. Take a look at your budget, and use a loan calculator to calculate your monthly payments and interest charges. Make sure you have a clear plan for repayment, so you don’t get stuck with debt you can’t afford — what’s more, make sure not to borrow more than you need.

It can also be a good idea to shop around and compare offers from multiple lenders to ensure you find the loan with the lowest cost of borrowing.

As mentioned, some online lenders let you prequalify, meaning you can check your rates with no impact on your credit score. Take your time to do your due diligence and shop around before signing on the dotted line.

Secured vs. unsecured loan: Which is better for you?

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 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.

Improve your credit before applying

If you prefer an unsecured loan to a secured one, you might need to improve your credit before applying. Credit is a major part of the qualification process, and it’ll also determine what rate you get on a loan.

Along with checking your credit report, make sure to monitor your score with a free service, such as the one offered by LendingTree. Take steps to boost your score, like paying down debt or reducing your credit utilization ratio. Another way to strengthen your application for a loan is to apply with a creditworthy cosigner.

Loans that come with high interest rates and fees can trap you in a cycle of debt. Do your best to improve your credentials as a borrower, so you don’t get stuck with a high rate.

Repaying secured and unsecured loans

Which type of loan should you prioritize paying off first?

If you’re struggling to make payments on your debts, it’s typically best to prioritize secured debt, so you don’t lose your collateral. However, defaulting on any type of loan can have negative consequences, so reach out to your lender to work out an arrangement if you’re struggling to afford your payments.

If you’re looking to accelerate repayment to get out of debt faster, consider using the debt avalanche method of repayment. With this approach, you make extra payments on the debt with the highest interest rate first. This approach will help you save the most money overall.

Another approach is the debt snowball method, which has you target your debts with the smallest balances first. And while it might not save you as much money in the long run, the debt snowball could motivate you by providing quicker wins. For example, you might be able to pay off a smaller balance completely, which could encourage you to move on to the next-lowest debt and tackle it with the same effort.

Where can you get help with repayment?

If you’re struggling to keep up with your debt payments, there are a few options that might help. For one, you could consider consolidating your debt with a debt consolidation loan, which could potentially readjust your monthly payments, lower your interest rate and simplify debt repayment.

You might also reach out to your loan servicer about setting up an alternative arrangement that better fits your budget, or you could seek out credit counseling from a nonprofit organization.

Finally, you might consider alternative options, such as a debt management plan, debt settlement or even bankruptcy. This guide explains more about your options for debt relief.

 

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