When you apply for a loan or a line of credit, you may notice that the offers you get are deemed “secured” or “unsecured.” If you’re new to borrowing, you probably are curious what this means and how it will impact your application process. Let's start with understanding the type of loan you have before you sign on the dotted line.
What’s a secured loan?
A secured loan or line of credit is backed up, or "secured", by money or an item that can be repossessed in the event that you stop paying the loan - like a car or house. In other words, it’s a loan that has collateral on the line.
What categories of loans are secured loans?
Any type of loan that is specifically used for the purchase of an item that can be repossessed is a secured loan. For example, mortgages are secured loans because the home can be foreclosed upon if you stop paying the loan. Auto loans are secured loans because the car can get repossessed. Some credit cards are "secured" when you have to first deposit an amount before being issued the card. If you don't make the payment, then the issuer keeps the cash deposit.
What’s a secured line of credit?
A secured line of credit requires you to give a deposit on the credit line before you can use your card. If you stop paying the card, the credit card company keeps the deposit and will most likely close the account.
What is an unsecured loan?
An unsecured loan is a loan that has no collateral attached to it. There is no risk of repossession with an unsecured loan or line of credit. This makes it more attractive to borrowers, though the standards to get accepted for such a loan can be higher.
What categories of loans are unsecured loans?
Unsecured loans are often used for personal loans, medical financing, or even debt consolidation. If you have used payday loans, these tend to fit under the same umbrella.
What types of credit cards are unsecured?
Most credit cards are unsecured. The card issuer (typically a bank or credit union) does limit the amount you can spend with the card, but unlike secured cards, there is no deposit required beforehand.
Article adapted and published in partnership with Credit Mountain.
FAQs
With a Savings Secured Loan, the money you already have on deposit is used as collateral, and you can borrow up to the amount you have in your savings with terms Up to 60 months. All secured loans require collateral. For example, when you take out an auto loan, the car is used to secure the loan.
What is secured vs unsecured loan? ›
Secured loans require some sort of collateral, such as a car, a home, or another valuable asset, that the lender can seize if the borrower defaults on the loan. Unsecured loans require no collateral but do require that the borrower be sufficiently creditworthy in the lender's eyes.
Which is better secured or unsecured line of credit? ›
Key Takeaways. A secured line of credit is guaranteed by collateral, such as a home. An unsecured line of credit is not guaranteed by any asset; one example is a credit card. Unsecured credit always comes with higher interest rates because it is riskier for lenders.
Do banks prefer secured loans? ›
In general, secured loans are easier to qualify for since your collateral gives the lender additional peace of mind — if you fail to make payments, the lender can recover its money by seizing and selling your asset. For that reason, secured loans also tend to have lower interest rates than unsecured loans.
What credit score is needed for a secured loan? ›
What Credit Score Is Needed for a Secured Personal Loan? Every lender is different. One may require a credit score of 670, while another doesn't set a minimum score requirement. You'll have to check the eligibility requirements of lenders you're considering to see if they require a minimum credit score or not.
How easy is it to borrow from a credit union? ›
Eligibility requirements for personal loans from credit unions are less strict than a bank's criteria. In particular, a low credit score may not disqualify you from a loan with a credit union, because a credit union is more likely to take into account your overall financial circ*mstances.
How much can I borrow unsecured? ›
Unsecured loans are typically for smaller amounts, usually between £1,000-£25,000, whereas a secured loan can be for up to £100,000 or more.
What happens if you don't pay back a secured loan? ›
A secured loan is a loan attached to your home or a property you own. If you cannot pay the debt, the lender can apply to the courts and force you to sell your home to get their money back.
Is it easier to get a secured or unsecured loan? ›
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.
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.
Because of the lower risk to the lender, secured loans are often easier to get than unsecured loans. If you have poor or even no credit, you might still be able to qualify for a personal loan if you can provide collateral for a loan.
Are secured loans bad for credit? ›
When you take out a secured loan, many lenders will add a record of it to your credit file. This may reduce your credit score. However, if you make your loan payments on time, the long term effect on your credit score is usually positive. If you default on your loan, a record will go on your credit file.
Is it smart to get a secured loan? ›
Because secured loans are considered less risky, interest rates are often lower than they would be without collateral. In the case of secured credit cards and loans, making a cash deposit upfront might allow you the opportunity to build credit when unsecured credit is not an option.
Which type of loan is typically easier to get? ›
Some of the easiest loans to get approved for if you have bad credit include payday loans, no-credit-check loans, and pawnshop loans. Personal loans with essentially no approval requirements typically charge the highest interest rates and loan fees.
What are the main disadvantages of a secured loan? ›
The main disadvantages of secured loans include the potential to lose your collateral. Failure to pay back your loan could mean you lose your house, car or financial account — whatever you pledged as security on the loan.
How much collateral is needed for a secured loan? ›
Any assets you pledge should be worth at least as much as the amount your business wants to borrow. In other words, if you want to take out a $100,000 secured business loan, you may need to provide $100,000 worth of collateral to back the financing.
Do I get my money back on a secured loan? ›
You get your deposit back when you close the account. Because your assets can be seized if you don't pay off your secured loan, they are arguably riskier than unsecured loans. You're still paying interest on the loan based on your creditworthiness, and in some cases fees, when you take out a secured loan.
Does a secured loan hurt your credit? ›
Your credit will benefit from a secured loan if you make on-time payments. Payment history accounts for 35% of your FICO® Score☉ , making it the most significant single factor that impacts your creditworthiness. Positive payment history will remain on your credit report for 10 years after you pay off the loan.
