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Secured vs. Unsecured Personal Loans

A secured loan requires collateral, while an unsecured loan doesn’t. Learn how that makes a difference and which loan type you should get.

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By Erin Gobler

Written by

Erin Gobler

Writer

Erin Gobler is a freelance personal finance writer with more than eight years of experience writing online. She’s passionate about making the financial services industry more accessible by breaking down complicated financial topics in simple terms.

Edited by Meredith Mangan

Written by

Meredith Mangan

Senior Editor

Meredith Mangan is Credible's Senior Editor for Personal Loans. Since 2011, she’s helped steer content creation in the areas of mortgages and loans, insurance, credit cards, and investing for major finance verticals, including Investopedia, Money Crashers, and The Balance.

Updated January 17, 2024

Editorial disclosure: Our goal is to give you the tools and confidence you need to improve your finances.

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While most personal loans are unsecured, some lenders offer secured personal loans that can potentially reduce your annual percentage rate (APR) or make it easier to qualify. The difference between secured and unsecured personal loans is collateral. A secured loan is guaranteed by some form of collateral, like your car or the fixtures in your home, whereas an unsecured loan is not. 

Whether you should use a secured or unsecured loan depends on your credit score, what assets you own, and what you’re planning to use the money for. Before applying for a personal loan, make sure you understand how each type works to choose the best personal loan for your situation.

Types of unsecured loans

There are several types of unsecured loans:

  • Personal loans: As noted, personal loans can be either secured or unsecured, with the bulk being unsecured. Personal loans provide a sum of cash upfront that you can use for almost any purpose. The loan is typically paid back in monthly installments with interest over a period of years.
  • Credit card: A credit card is perhaps the most common type of unsecured debt. You’re offered a credit limit based on your credit history and can freely spend up to that credit limit. However, you must make at least the minimum monthly payment to avoid hurting your credit score. The average credit card interest rate was 20.68% as of May 2023, according to the Federal Reserve.
  • Student loan: A student loan helps you pay for expenses related to higher education, including tuition, room, and board. Student loans are offered by both the federal government and private lenders.
  • Personal line of credit: A personal line of credit is like a mix between a personal loan and a credit card. You can draw from a credit line at any time, but only up to your credit limit, similar to a credit card.

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Types of secured loans

Any loan that requires collateral is a secured loan. Here are some general types of secured loans:

  • Mortgage: A mortgage is a secured loan used to buy a home. When you buy a home, the house itself serves as the collateral. If you fail to make your mortgage payments, your lender may foreclose on your home.
  • Auto loan: When you finance a car, you usually do so with a secured auto loan. Just like with a mortgage, if you don’t make your car payments, the lender can seize your vehicle — this is known as repossession.
  • Secured credit card: A secured credit card is one that requires a security deposit when you sign up. You’ll use it like a normal credit card, but the card issuer will hold on to your security deposit in case you don’t pay back what you’ve used.
  • Home equity loans and HELOCs: Both home equity loans and home equity lines of credit (HELOCs) are ways of using your home as collateral for a loan, similar to your mortgage. These loans are sometimes known as second mortgages and are based on how much equity you have in your home.
  • Personal loans: Personal loans are typically unsecured, but some lenders offer secured personal loans, which can make it easier to qualify or lower your rate

Differences between secured and unsecured loans

The key difference between a secured and unsecured loan is that a secured loan requires collateral, while an unsecured loan doesn’t. 

The collateral serves as an insurance policy for the lender. If you fail to make your loan payments on a secured loan, the lender can seize your collateral, which could be your home, your car, money in your bank account, or something else of value, depending on the type of loan. For example, a mortgage is a type of loan secured by your home, as is a home equity loan, while an auto loan is secured by the car you drive. Personal loans, on the other hand, can be either secured or unsecured — and most are unsecured.

Secured
Unsecured
Credit score
Lower credit scores accepted
Requires a higher credit score
Loan limits
May be able to borrow more
Less borrowing power relative to a secured loan
Rates
Lower APRs
Higher APRs
Collateral
Requires collateral
Doesn’t require collateral
Risk to lender
Lower risk to lender
Higher risk to lender
Risk to borrower
Risk of losing the asset securing the loan
Less risk in the event of a default

Securing a loan with collateral impacts the loan’s terms in both positive and negative ways. Generally speaking, a secured loan may be easier to qualify for or offer a lower rate, but you risk losing the asset you put up as collateral if you miss too many payments.

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How to get a secured personal loan

Secured personal loans aren’t as common as unsecured ones, but there are lenders that offer them. When you apply, you’ll have to provide an asset of yours to serve as collateral. Acceptable types of assets will vary by lender, but some things that could be used as collateral on secured personal loans include certain financial accounts, your vehicle, and items in your home.

Despite having collateral for your loan, you’ll still have to meet other loan requirements, including: 

  • Minimum credit score: Lenders prefer borrowers with a good FICO score, which is above 670. But with a secured loan, you may qualify with a fair (580 to 669) or even poor (less than 580) FICO score. 
  • Minimum annual income: Lenders each have their own minimum income requirements. Some may be as high as $100,000 annually, while others may be less than $5,000. Securing your loan with collateral could improve your application if your income is low.
  • Debt-to-income ratio: Lenders consider your debt-to-income ratio (DTI), or how much of your monthly income goes toward current debt. Most prefer a DTI below 35%.

Review lender requirements to determine which fit your situation — look for lenders that accept borrowers with your credit score and income, for example. Also, consider how long you’ll need to repay the loan and find lenders that offer the repayment term you're looking for. Once you’ve narrowed the field, prequalify with multiple lenders to compare loan estimates. 

Important: When you prequalify, the lender will conduct a soft credit inquiry, which does not hurt your credit score. However, when you apply for a personal loan, your credit score may decrease temporarily by a few points.

Once you’ve compared lenders and quotes, choose which loan you’d like to apply for. You’ll need to provide proof of income, such as pay statements and/or bank statements, and proof of the collateral’s worth. Secured loans may take longer to process (and get approved for) since the lender needs to verify the value of your collateral.

Once your loan is approved, review the agreement and sign if it’s acceptable. Be sure to make on-time payments to avoid hurting your credit score and putting your collateral at risk. Because unsecured loans are riskier for borrowers, they tend to make more sense if you’re struggling to qualify for a personal loan due to a low credit score, insufficient income, or a high DTI.

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How to get an unsecured personal loan

Unsecured personal loans are significantly easier to find because so many lenders offer them. But the process of comparing and applying for an unsecured personal loan is virtually the same as applying for a secured personal loan. The only difference is you don’t need to prove the value of your collateral — which means unsecured personal loans may be approved as soon as the same day you apply, depending on the lender. 

However, you may be subject to stricter borrowing requirements or be approved at a higher APR. The stricter requirements account for the fact that the lender is taking on more risk relative to a secured loan. Unsecured loans are often a better fit for borrowers with a good credit score and profile.

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-

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8.49% - 17.99%

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760

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8.49% - 35.99%

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600

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8.99% - 35.99%

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9.95% - 35.99%

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$2000 to $35000

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550

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