Unsecured vs. Secured Personal Loans
While borrowing money isn’t always ideal, there are plenty of times when taking out a loan could leave you better off. Maybe you need to pay for a major home repair or remodel your kitchen after years of neglect. Or perhaps you need to consolidate high interest debt so you can get a handle on your finances.
Whatever the reason, personal loans offer a smart and predictable way to borrow money. Since personal loans tend to come with fixed interest rates and a fixed repayment schedule, borrowing money this way allows you to create a repayment plan from the start. Since you may also have a fixed monthly payment, you can easily predict how much you owe each month and plan your budget accordingly. That could make them a better option than credit cards, which come with variable interest rates and harder-to-predict monthly payments.
But there are two major types of personal loans: secured and unsecured. Here’s a look at the differences and similarities between the two.
How unsecured and secured personal loans differ
Once you are sure a personal loan is the right way for you to borrow money, you have another decision to make. Should you borrow money with an unsecured personal loan? Or would a secured personal loan leave you better off?
If you’re unsure what these descriptions entail, here’s a basic primer:
- Unsecured loans offer funds that are not secured by collateral. With this type of loan, you are offered funds without having to secure your loan with your personal assets.
- Secured loans are loans that require collateral to back them up. With a secured personal loan, you may receive funds only after you offer assets the lender can keep if you default.
The following table explains more about unsecured and secured personal loans, how they work and what to expect when you apply:
|Unsecured vs Secured|
|Unsecured personal loan||Secured personal loan|
|What’s required to get one||Lenders will consider your credit history and credit score in most cases, along with your employment status, income and debt-to-income ratio||Some secured personal loans may not require a credit or income check, but it depends on the type of collateral you put down. If you use your car as collateral, for example, you may qualify for a secured loan without a credit check. Secured credit cards may also be available to consumers with poor credit or thin credit profiles|
|Average APRs||Starting at 3.99% depending on the lender and your creditworthiness||Varies based on the type of loan; secured loans that use an auto as collateral may have rates as low as 5.2% while title and payday loans can have considerably higher rates|
|Fees||Some personal loans come with an origination fee that ranges between 1% and 8%. However, many personal loans come without any fees||Depends on the type of loan; some secured loans come with annual fees, origination fees or application fees; some secured credit cards come with an annual fee and other fees|
Unsecured personal loans: Key features
Unsecured personal loans provide a simple repayment process that makes them a consistent, predictable choice. Not only can you apply for an unsecured personal loan online and from the comfort of your home, but you can select a loan with a fixed interest rate, fixed repayment schedule and fixed monthly payment you can always count on. Some consumers may prefer the stability of a fixed payment and repayment schedule due to the fact it could make budgeting for their loan payment easier.
Many consumers also choose unsecured personal loans because they offer an affordable way to borrow money. While the average credit card APR is now over 15%, you may be able to qualify for an unsecured personal loan with an APR as low as 3.99%. That’s a huge disparity in the interest you’ll pay on two different borrowing options, and it just goes to show the kind of savings you can garner with a personal loan.
While some lenders do charge an origination fee or other fees, many unsecured personal loans come without any type of fees.
You can explore personal loan options using this tool from LendingTree. You’ll input information about yourself and what you’re looking for in a loan. You may then be matched with up to five different lenders.
If you take out an unsecured personal loan and stop making payments, you can also rest assured that none of your assets will be seized. This is a departure from secured personal loans that require you to put down collateral to borrow money. However, it’s important to note that defaulting on an unsecured personal loan will ultimately harm your credit score.
Pros and cons of unsecured personal loans
While unsecured personal loans can be the right option under the right circumstances, there are a few details you should consider before you move forward.
- You don’t have to put down collateral to borrow money.
- You can borrow money for almost any reason with a fixed repayment schedule, fixed interest rate and fixed monthly payment.
- It’s easy to shop around and compare unsecured personal loans online.
- Consolidate high-interest debt into a new loan with a lower interest rate and set payoff date.
- It’s possible you’ll pay a higher interest rate if you don’t put down any collateral.
- You will damage your credit score if you stop making payments and default on your loan.
- Borrowing money always comes with risk, including the risk of overspending or borrowing more than you can truly afford to pay back.
With these pros and cons in mind, unsecured personal loans are best for the following types of borrowers:
- Consumers who have good credit and can qualify for competitive interest rates
- Anyone who needs to borrow a fixed amount of money and repay their loan over time
- People who could benefit from consolidating high-interest debt into a new loan with a lower interest rate
- Someone who has a strong handle on their finances and knows they can repay their loan according to its terms.
Secured personal loans
Secured personal loans can vary widely in their terms and conditions based on the type of loan you take out. This is mainly based on the type of collateral you put down — and the fact that your loan terms can vary depending on the type of assets you have.
The most common types of secured loans include:
|Understanding Secured Loans|
|Type of loan||How it works||What to watch out for|
|Secured personal loans that let you use money in savings or stocks as collateral||These loans let you borrow a set amount of money with a fixed interest rate and fixed repayment term.||Compare lenders to make sure you are paying minimal fees or no fees.|
|Title loans that let you borrow against the title of a paid-off car||These loans are often short-term, lasting only 15 to 30 days on average.||Interest rates can be upward of 300% with title loans. Your car will also be repossessed if you don’t repay what you borrow.|
|Home equity loans||These loans let you borrow a fixed amount of money with a fixed repayment schedule and fixed interest rate. With a home equity loan, you’ll use the value of your home as collateral.||You can lose your home if you don’t repay your loan.|
|Home equity lines of credit (HELOCs)||These loans let you borrow against the equity in your home and your interest rate is usually variable. Your monthly payment will depend on how much you borrow.||You could lose your home if you default and stop making payments.|
|Payday loans that let you borrow against your future earnings or “your next payday”||These loans are often short-term (usually lasting around two weeks) and come with limits as low as $500.||Interest rates are excessively high and high fees are also common. Because of the high cost of these loans, they often trap consumers in a cycle of debt.|
|Secured credit card that lets you borrow against cash you put down||Secured credit cards require a cash deposit as collateral. They typically come with limits in the $200 to $500 range, but these amounts can vary.||Watch out for fees and high interest rates on secured credit cards.|
If you do have collateral in the form of cash savings, stocks or home equity, a secured loan can make a lot of sense. The fact that you’re putting down assets or some type of collateral can help you secure a lower interest rate and credit requirements may not be as great. If your credit isn’t stellar, a secured loan may also be the only type of loan you can qualify for. At the very least, a secured loan may make it possible to borrow more money than you could get with an unsecured loan.
You can also face consequences if you default on any type of secured loan. Not only can you hurt your credit score and end up with damaging information on your credit report if you default, but you may also lose the asset you put down as collateral plus additional assets.
Pros and cons of secured personal loans
Before you sign up for a secured loan and put down collateral, consider these pros and cons:
- You may be able to qualify for a lower interest rate if you put down collateral as part of the borrowing process.
- You can build credit and improve your credit score over time.
- These loans may be easier to qualify for than unsecured loans if you have poor credit.
- Some types of secured personal loans are overly expensive and risky. Auto title loans and payday loans are some of the worst options available, which is why we don’t recommend them.
- You could lose your collateral at the very least if you default on your loan. If the asset you put up as collateral isn’t worth as much as you owe, the lender could also come after you for the difference.
- You’re also putting your credit score at risk if you default.
While secured loans aren’t perfect, they can be the right option for certain types of consumers. Secured personal loans usually work best for:
- Consumers with considerable assets they can put down as collateral to secure a lower interest rate
- Borrowers who have a good grasp on their finances and know they can repay their loan and avoid default
- Anyone who wants to build credit but may not be able to qualify for an unsecured loan
Unsecured vs. secured personal loan: Which is best for you?
Still can’t decide between a secured loan or a personal loan? While either could be a smart option for your finances, there are a few factors that can help you decide which way to go. Consider these tips to choose the right loan for your needs:
- Look at your credit score. While secured loans often come with the lowest interest rates since you’re putting down collateral, you may still qualify for a great rate on an unsecured loan if your credit is good. Make sure to check your credit score to see where you stand before you apply for any type of loan.
- Get preapproved and shop around for the best deal. No matter which type of loan you choose, make sure to shop around to compare lenders and their fees, interest rates and terms. Also note that some lenders will let you get preapproved without a hard inquiry to your credit report. This can help you see whether you may qualify for the loan you want (secured or unsecured) without a hard inquiry.
- Decide whether you want to put collateral at risk. The biggest downside to secured loans is the fact that you’re putting something at risk — whether that’s your home, your car or cash you have in savings. If you don’t want to put any of your assets at risk, then a secured loan may not be the way to go.
The bottom line
If you need to borrow money for almost any reason, an unsecured or secured loan could be exactly what you need. Before you pull the trigger, however, you should compare loan options, so you know exactly what each loan you’re considering entails.
The best personal loans come with minimal or no fees, an interest rate that is competitive for someone with your credit rating and terms and conditions that are easy to understand. By considering more than one loan, you can find the best option for your needs and your lifestyle.