Secured vs. Unsecured Personal Loans—What's the Difference?

May 09, 2019 · 4 minute read

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Secured vs. Unsecured Personal Loans—What's the Difference?

A personal loan allows a borrower to borrow money from a bank, credit union, or online lender in order to cover major expenses such as medical bills, career training, or home repair costs.

It can also be used to consolidate high-interest credit card debt. Personal loans typically come in two different forms: secured and unsecured. The major difference between the two is collateral.

In this post, we will be explaining the difference between secured versus unsecured loans and highlighting some of the pros and cons of each. We should mention up front, however, that this is a very high-level overview of personal loan types, and isn’t a substitute for advice. Everyone’s financial situation is unique, and you should always consult with a professional if you have questions about financial topics like personal loans.

What are Secured Personal Loans?

With a secured loan, the borrower offers something of value, such as their house or car as backing—also called “collateral”—for the loan. Some examples of these types of loans include home equity or a car title loan. The lender has the right to take ownership of the collateral in the event that the borrower stops making payments.

This gives the lender the right to take ownership of the property in the event that the borrower stops making payments. A lender will usually give the borrower notice that they have defaulted on their loan and allow them the opportunity to become current in their payments.

Pros of Secured Loans

Given that a secured loan involves collateral, the lender typically views these types of loans as less “risky.” The borrower is less likely to default because it would put their property at risk. And because there is less risk for the lender, they are more likely to offer lower interest rates or higher loan amounts than they might for unsecured loans.

Cons of Secured Loans

The major drawback of a secured loan is that the borrower faces the potential risk of losing their collateral if they are unable to continue paying.

The other major drawback is that the approval process can be more complicated and usually requires more time and paperwork.

What are Unsecured Personal Loans?

With an unsecured loan, a borrower doesn’t have to offer collateral in order to qualify. The lender is therefore taking on more risk. A lender will and rely on the borrower’s creditworthiness in order to determine whether to approve the loan.

Pros of Unsecured Loans

The approval process for an unsecured loan is typically simpler and faster (but not necessarily easier in terms of getting qualified). It also typically requires less paperwork. Additionally, with an unsecured loan, the borrower doesn’t risk losing valuable property in the event of nonpayment.

Cons of Unsecured Loans

Given that an unsecured loan is riskier for the lender, the loan limits are usually smaller. Lenders typically charge a higher interest rate than they do for a secured loan.

While a borrower doesn’t risk losing collateral, the lender still has the right to take steps to collect the debt. Failure to pay back the loan can also severely impact a borrower’s credit score, and the damage can last for years.

Both secured and unsecured personal loans can be a great way to help a borrower access funds without having to incur high interest credit card debt. As with any loan, a borrower should carefully evaluate the advantages and risks in order to make an informed decision based on their unique financial situation.

The extra cash a personal loan provides could help a borrower cover an emergency and achieve financial goals that may not have otherwise been possible, such as paying off credit cards, paying off high interest debt, or conducting a major home renovation.

Secured vs Unsecured: How to Choose

So now that you know the difference between secured and unsecured loans, how can you determine which is the right choice for you?

In general, you may have a better chance at qualifying for a secured loan because of the collateral you will have to put up.

Additionally, secured loans tend to have lower interest rates, because the lender has something it can take in the event of non-payment. Plus, lending limits are typically higher on secured loans—if a larger loan amount is most important for your needs.

But, if you have a solid financial profile, you may be able to qualify for an unsecured loan which you would not have to put up any collateral for. This can be a better route for some people who do not want to risk any of their belongings (a house or car) or may not have any collateral to offer.

It’s a good idea to shop around with different lenders to compare interest rates, fees, lending limits, and types of personal loans to see which is the right fit for you.

SoFi Personal Loans

If you are interested in applying for an unsecured personal loan, check out SoFi. SoFi offers low-rate unsecured personal loans with no fees. Yes, that’s right.

No origination fees, no prepayment fees, and no late fees. Whether you have a cross-country move coming up or need help with unexpected medical bills, you can check your personal loan rate in just minutes.

Check out SoFi’s personal loan calculator to see how much interest you could save if you paid off high-interest loans with a SoFi personal loan.

To learn more about how a personal loan can help improve your financial situation, check to see what SoFi Personal Loan rates you qualify for.

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