Secured vs. Unsecured Loan: What’s the Difference? - NerdWallet (2024)

MORE LIKE THISPersonal Loan ReviewsPersonal LoansLoans

The main difference between secured and unsecured loans is collateral: A secured loan requires collateral, while an unsecured loan does not.

Unsecured loans are the more common of the two types of personal loans, but interest rates can be higher since they’re backed only by your creditworthiness.

Here are key differences in how secured personal loans versus unsecured personal loans work, which lenders offer them and how to qualify.

Pros and cons of secured and unsecured loans



Secured loans

  • If you have a low credit score, you may have an easier time qualifying compared with an unsecured loan.

  • If you fail to repay the loan, the lender can seize the collateral.

Unsecured loans

  • No collateral is required, so you won’t risk losing an asset.

  • You’ll need a strong credit score and solid finances to get the best offer.

How does a secured loan work?

A secured loan requires you to back it with collateral, such as your car or an investment account, as part of the application process. Collateral can take your application a step further to get you a lower rate on a personal loan or a higher loan amount, but you risk losing your asset if you fail to repay the loan.


Secured vs. Unsecured Loan: What’s the Difference? - NerdWallet (1)

Self Credit-Builder Loan

NerdWallet partners with Self to help you build credit for the things that matter - no credit score needed to get started.

learn more

at Self

» MORE: What is a secured loan?

What to know about secured loans

Qualifying: Secured personal loans can be easier to qualify for than unsecured loans. A lender considers your credit score, history, income and debts, but adding collateral to the application can lower the lender’s risk and give it more confidence to lend to you.

Rates: Secured loans typically have lower annual percentage rates than unsecured loans. Rates are decided using the same factors lenders review to qualify you, so the value of your collateral can affect your rate.

If you secure financing with a vehicle, for example, the value of the vehicle is a factor in deciding whether you qualify and what rate you’ll get.

» MORE: Compare the best secured loans

Repayments: Secured personal loans are usually repaid in fixed, monthly installments over a few years. Secured loans may have variable rates, which means monthly payment amounts can also vary.

Risk: The penalty for not repaying a secured loan is twofold: Your credit will suffer, and the lender can seize the collateral, sometimes after only a few missed payments.

Even one missed payment can drop your credit score by as many as 100 points, and the impact on your credit won’t be softened because it’s a secured loan.

Where to get them: You can get a secured loan from a bank, credit union or online lender, though they’re more common from banks and credit unions. These loans are typically secured with a savings or certificate of deposit account, which you usually can’t access until the loan is repaid in full.

Online lenders that offer secured loans tend to require a vehicle as collateral: Oportun, Upgrade and OneMain all offer vehicle-secured loans. The lender may want the vehicle appraised before it lends to you.

Uses for secured loans

You can use funds from a secured personal loan for almost any purpose. You might secure the loan with a car you own, but you can use the funds for a home improvement project or other large expense.

How does an unsecured loan work?

An unsecured loan doesn’t require collateral, so approval is based on your credit. For some borrowers, this could mean paying more interest than they would with a secured loan, but they won’t risk losing an asset.

What to know about unsecured loans

Qualifying: Borrowers with good and excellent credit (690 credit score or higher) usually have the best chance of qualifying for an unsecured loan. Lenders review your credit score, history and debt-to-income ratio to decide whether you qualify. Some lenders review alternative data like your college education and where you live, too.

Rates: Unsecured loans have fixed rates that typically range from 6% to 36%. The lowest APRs usually go to the most qualified borrowers, while borrowers with fair or bad credit scores (689 credit score or lower) will get higher rates.

» MORE: Compare the best unsecured loans

Repayments: Unsecured loans are repaid in fixed, monthly installments, and repayment terms are usually two to seven years.

Risk: Unsecured loans may be a safer choice for some borrowers. If you fail to repay, only your credit will be affected. Some lenders allow you to go on a hardship plan if you can’t make your monthly payments. These plans can involve lowering or deferring monthly payments.

If the loan is in default, which happens between 30 and 90 days after you miss a payment, it could be sent to collections and ultimately the collections agency can take you to court.

Where to get them: Online lenders can have low rates and features like fast funding and a fully online process.

Not all banks offer unsecured loans. U.S. Bank, PNC and Wells Fargo are among the national banks that do. Banks may offer a lower rate if you’re already a customer. Credit unions also offer unsecured loans.

Uses for unsecured loans

There are few restrictions on how you can use the funds from an unsecured personal loan. Common uses include debt consolidation and home improvement projects, both of which can help improve your overall financial picture.

Vacation, wedding and moving loans are also often unsecured, though personal loans are not typically recommended here since there may be more affordable ways to pay.

Should you get a secured or unsecured personal loan?

If you think an unsecured loan may be a good fit for your financial needs, consider pre-qualifying to see which rates a lender can offer you. Pre-qualifying doesn’t affect your credit, and it can give you an idea of how the monthly payments will fit into your budget.

If you think a secured loan may be a better option, consider whether borrowing money is worth the risk. For example, if you need your car to get to work and a lender requires it as collateral, losing the car could also cause you to lose income.

Some online lenders offer personal loans for bad-credit borrowers, and they don’t always require collateral. But if you’re confident that you can make your payments on time and want a lower rate, collateral can be a good way to get there.

» COMPARE: See your bad-credit loan options

Secured vs. Unsecured Loan: What’s the Difference? - NerdWallet (2024)


What is the main difference between a secured and an unsecured loan? ›

The main difference between secured and unsecured loans is collateral: A secured loan requires collateral, while an unsecured loan does not. Unsecured loans are the more common of the two types of personal loans, but interest rates can be higher since they're backed only by your creditworthiness.

Is it always worse to be unsecured rather than secured? ›

Key takeaways

Because lenders take on more risk, unsecured debts tend to have higher interest rates and stricter eligibility requirements than secured debt. Mortgages, home equity loans, home equity lines of credit (HELOCs) and auto loans are all forms of secured debt.

Why would someone get a secured loan? ›

Secured loans are business or personal loans that require some type of collateral as a condition of borrowing. A bank or lender can request collateral for large loans for which the money is being used to purchase a specific asset or in cases where your credit scores aren't sufficient to qualify for an unsecured loan.

Why does an unsecured loan have a higher? ›

Because unsecured loans are not backed by collateral, they are riskier for lenders. As a result, these loans typically come with higher interest rates.

Is it a bad idea to get a secured loan? ›

A secured loan can help you build credit if you make all payments on time, but since secured loans are backed by collateral, there is risk involved. Other credit products could help you build credit without as much risk.

Is unsecured or secured better? ›

Key takeaways. Secured and unsecured credit cards have similarities, but they are different types of credit cards. Secured cards require a deposit, unlike unsecured cards. Compared to secured credit cards, unsecured credit cards may have lower interest rates and fees and higher credit limits.

Do unsecured loans hurt your credit? ›

A personal loan can affect your credit score in a number of ways⁠—both good and bad. Taking out a personal loan isn't bad for your credit score in and of itself. However, it may affect your overall score for the short term and make it more difficult for you to obtain additional credit before that new loan is paid back.

What is bad about an unsecured loan? ›

Because unsecured loans don't require collateral, they are riskier for lenders than secured loans—instead of seizing assets if a borrower defaults, banks are limited to collection actions like wage garnishment.

What are two disadvantages of unsecured loans? ›

Because an unsecured personal loan has no collateral backing it, you may encounter higher interest rates, fees and other things they could limit how far is the loan could go. In addition, the lack of collateral could make it hard for those with lower credit scores to get approval.

Do banks prefer secured loans? ›

Secured loans are typically easier to qualify for and have lower interest rates because they pose less risk to the lender. Knowing precisely what you are promising and what you stand to lose is important before you take out a secured loan.

Can a secured loan be written off? ›

Most people have a loan secured by property, such as a mortgage or a car loan. These debts, called "secured debts," can be tricky in Chapter 7 bankruptcy. Although you can wipe out or "discharge" a secured loan in Chapter 7 bankruptcy, you'll lose the property you purchased if you don't pay for it after bankruptcy.

Which type of loan is less risky for a lender? ›

Secured loans allow the lender to repossess your asset if you fail to keep up with your loan payments. As a result, they are generally seen as less risky for the lender, so they often come with more lenient qualifying standards and higher loan amounts than similar loans that don't have collateral attached.

What are 2 main advantages of unsecured loan? ›

The loan and application process for unsecured loans takes much less time than those of a secured loan and is typically approved in just a few business days. The interest rate on unsecured Personal Loans is much lower than those on credit cards, saving you tons of money on interest charges each month.

Which type of debt is most often unsecured? ›

Unsecured debt is any debt that is not tied to an asset, like a home or automobile. This most commonly means credit card debt, but can also refer to items like personal loans and medical debt.

Why do banks make unsecured loans? ›

Lenders may offer people with higher credit scores unsecured loans. These loans require no collateral, so the bank or lending institution is trusting that these borrowers will pay them back. This trust is based on their credit history—what borrowers have done in the past that gives them a good credit rating.

What is the primary difference between a secured and unsecured loan quizlet? ›

What is the difference between a secured and unsecured loan? Secured loan uses collateral (i.e. car or house) where unsecured does not use collateral (loan made just on promise to pay it back).

What is the main difference between unsecured credit and Secured credit quizlet? ›

Which describes the difference between secured and unsecured credit? Secured credit is backed by an asset equal to the value of a loan, while unsecured credit is not guaranteed by a material object.

What are the main advantages to a secured vs unsecured loan quizlet? ›

Secured: requires collateral which the lender can take but offers lower interest rates. Unsecured; does not require collateral but is more risky and therefore comes with higher rates.

What is the difference between a secured loan and a regular loan? ›

Read our editorial guidelines here . If you're debating whether to take out a secured or unsecured loan, you should know that the main difference between the two is whether there is a collateral requirement. Secured loans require collateral, while unsecured loans don't.

Top Articles
Latest Posts
Article information

Author: Trent Wehner

Last Updated:

Views: 6017

Rating: 4.6 / 5 (76 voted)

Reviews: 91% of readers found this page helpful

Author information

Name: Trent Wehner

Birthday: 1993-03-14

Address: 872 Kevin Squares, New Codyville, AK 01785-0416

Phone: +18698800304764

Job: Senior Farming Developer

Hobby: Paintball, Calligraphy, Hunting, Flying disc, Lapidary, Rafting, Inline skating

Introduction: My name is Trent Wehner, I am a talented, brainy, zealous, light, funny, gleaming, attractive person who loves writing and wants to share my knowledge and understanding with you.