Secured vs Unsecured Personal Loans — What’s the Difference?
Personal loans can be either secured or unsecured. A secured personal loan has collateral that backs the borrower’s promise to repay the loan. An unsecured personal loan does not require collateral, and the only thing backing the borrower’s promise to repay is their creditworthiness.
The collateral requirement is the main difference between secured and unsecured personal loans, but it can impact interest rates and create other differences that may inform your decision about which type of loan is best for you.
Table of Contents
Key Points
• Secured personal loans require collateral, such as a vehicle or savings account, while unsecured personal loans depend solely on the borrower’s creditworthiness.
• Borrowers may benefit from lower interest rates and better approval chances with secured loans, as lenders perceive them as less risky due to the collateral.
• Unsecured personal loans allow quicker application processes since there is no need to evaluate collateral, but they often come with higher interest rates.
• When choosing between the two loan types, factors like available collateral and intended use of funds should be carefully considered.
• Reviewing one’s credit report is essential before applying for a personal loan, as it impacts approval chances and loan terms offered by lenders.
What Is a Secured Personal Loan?
A secured personal loan is a loan for which the borrower pledges collateral that the lender can take possession of if the borrower fails to repay the loan. Put in simpler terms: If you default on your car loan, for example, the bank can repossess your car. For the lender, collateral equals a certain level of security.
Collateralized loans are common for mortgage and auto loans. A home is collateral for a mortgage, and a vehicle is collateral for an auto loan. They are somewhat less common for personal loans, though.
A personal loan isn’t tied to a particular asset in most cases, so there’s not an obvious item to pledge as collateral. The asset pledged must be owned by the applicant, and the lender will evaluate its value to be sure it’s equal to the amount of money being loaned. In some cases, a physical asset such as a vehicle is put up as collateral, but the collateral could also be an asset like a savings account or certificate of deposit.
Pros of Secured Personal Loans
While it may seem like the lender benefits more with a secured personal loan, there may also be advantages for the borrower.
• Lenders typically see secured personal loans as less risky than their unsecured counterparts because there is an asset to back the loan if the borrower defaults.
• Borrowers may get a lower interest rate on a secured personal loan than they might on an unsecured personal loan.
• Secured personal loans can be a good way for borrowers to build credit, as long as they make regular, on-time payments.
Cons of Secured Personal Loans
Things that a borrower might see as a drawback to a secured personal loan might be a benefit to the lender. But each party to the loan agreement takes risks.
• The lender is able to recoup its losses by seizing the collateral if the borrower defaults on their secured personal loan. However, it may take a while to liquidate that asset. If the collateral is a physical asset, such as a vehicle, it may take some time to find a buyer willing to pay the price the lender has set.
• For the borrower, the main drawback to a secured personal loan is the possible loss of the asset pledged as collateral if they default on their loan.
• The application and approval process may include more steps for a secured personal loan than an unsecured one because the asset’s worth will need to be valued.
What Is an Unsecured Personal Loan?
A personal loan that is backed mainly by the creditworthiness of the borrower is an unsecured personal loan. Sometimes called a signature loan, an unsecured loan does not require any collateral to guarantee the loan.
Defaulting on an unsecured personal loan can certainly have a negative effect on the borrower’s credit, but there wouldn’t be an asset to lose in addition. In terms of a guide to unsecured personal loans, see what the pluses and minuses are below.
Pros of Unsecured Personal Loans
Like their secured counterparts, unsecured personal loans can have benefits for both lender and borrower.
• Lenders may be able to charge a higher interest rate on an unsecured personal loan because there isn’t any collateral to secure the loan. (This is a drawback for the borrower — see below.)
• The borrower won’t lose an asset if they default on an unsecured personal loan.
• The application process for an unsecured personal loan is generally much quicker than for one that’s secured because there is no asset to be valued.
• Funds may be disbursed the same day or within a week, depending on the lender.
Cons of Unsecured Personal Loans
It may be relatively easy to find lenders who offer unsecured personal loans, but there are aspects that may be considered drawbacks.
• Interest rates on unsecured personal loans may be higher than for secured personal loans because there is no asset backing the loan.
• Some lenders may have minimum credit score requirements for approval of an unsecured loan, so applicants with poor credit may not qualify.
• If the borrower defaults, their credit score may be negatively affected.
• Applicants with lower credit scores may not qualify for loan amounts as high as those with higher credit scores.
Recommended: Personal Loan Calculator
How to Choose Between Secured and Unsecured Personal Loans
There are lots of reasons for considering a personal loan in general, but choosing between a secured and an unsecured personal loan means taking some specifics into account.
Do You Have Collateral?
One of the main things to consider when thinking about applying for a secured personal loan vs. an unsecured personal loan is whether you have an asset of value that you’d be willing to risk.
If you do have such an asset, you may want to compare lenders who offer secured personal loans. Some online lenders offer secured loans, but they’re more commonly available through banks or credit unions.
Lenders may offer higher loan amounts for a loan backed by collateral than for one that isn’t, so if you need to borrow a large amount, it might be worth looking into a secured personal loan.
What Are You Planning to Use the Funds For?
Personal loan funds can generally be used for a wide variety of things, like debt repayment, unexpected medical expenses, home improvement costs, and more.
If you need funds to pay multiple vendors or contractors — common in the case of wedding or home improvement costs — or you plan to consolidate credit card debt, an unsecured personal loan might be the right choice for you.
If you plan to purchase a specific item that might be considered an asset, however, the lender may want to attach that asset as collateral on the loan, thus making it a secured loan. Examples of this might be a secured personal loan to purchase land or to buy a boat.
What Type of Lender Is Right for the Loan You Need?
Another factor to consider when choosing between a secured or unsecured personal loan is the type of lender you’d rather work with.
• Unsecured loans may be available through banks, credit unions, or online lenders. Not every financial institution offers unsecured loans, however.
• Secured loans are more commonly offered by banks and credit unions and occasionally online lenders.
If you have a savings account or certificate of deposit at your bank that you’d be willing to put up as collateral, it might be worth looking into a secured loan with your current bank.
How Does Your Credit Score Factor In?
Accessing a loan typically involves a hard inquiry on your credit, as lenders want to know your score and see whether you have handled debt responsibly in the past. If you have, it’s a good indicator that you will do so again in the future.
Typically, you need a credit score of at least 580 to qualify for a loan, but those with scores of 700 and higher will likely be able to access more favorable rates and terms. So, if you have excellent credit, with a score of 800 to 850, you will usually be offered the best rates.
Qualifying For a Personal Loan
There are different factors that go into qualification for a personal loan, which is a key step before getting approved for a personal loan.
Each lender may have its own credit score, income, or debt-to-income ratio requirements, in addition to other factors. If you’re applying for a secured personal loan, each lender may have its own requirements for valuation of collateral.
It’s a good idea to compare lenders so you’ll have an idea of what they commonly require for an applicant to qualify for a personal loan. With that knowledge, you can better evaluate your own credit for the likelihood of being approved — or not.
Reviewing Your Credit Report
You can get a free copy of your credit report from each of the three major credit bureaus: Equifax®, Experian®, and TransUnion®. (Currently, these are available weekly.)
It’s a good idea to check all three because not all lenders report payment history to all three bureaus. The credit bureaus don’t share information with each other, so getting a complete picture of your credit may mean looking at all three reports.
Your credit report contains personal information about you and information about past and current credit accounts in your name.
Personal information includes:
• Name, current as well as any other names you may have gone by in the past
• Addresses, current and previous
• Birthdate
• Social Security number
• Employer
Lenders typically report:
• The total amount of the installment loan or line of credit
• Your record of on-time payments
• Any missed payments
If you’ve had any bankruptcies, foreclosures, or repossessions, they will likely be included on your credit report as well. They usually stay on your report for seven to 10 years.
If there is missing, incomplete, or incorrect information on your credit report, you can file a dispute with the credit bureau. It’s a good idea to clear up any errors before you start applying for a loan so you don’t have any unexpected roadblocks on the way to qualification.
If, in the process of reviewing your credit report, you find that you don’t have much of a credit history or your credit isn’t up to qualification standards, you may decide to take some time to work on improving your credit situation. That could mean increasing your income, lowering your expenses, paying down or consolidating existing debt, or just learning how to better manage your overall finances.
Meeting Income Requirements
Income requirements are likely to vary with the type and size of the loan you get. A $2,000 loan to pay off a medical bill may demand a less lofty salary than, say, taking out a $30,000 wedding loan to finance a major celebration of your big day.
Debt-to-Income Ratio Considerations
Another way that lenders evaluate if you are a good risk for a personal loan is looking at your debt to income ratio. This calculates how much of your money coming in goes toward debt. Typically, lenders want to see no more than 30% or 36% going toward debt, though in some cases, those with figures from 40% to 50% may be able to get approved. This is especially true if they have strong income and/or other positive factors.
Common Types of Collateral for Secured Loans
For secured loans, here are some typical sources of collateral:
• Money in bank accounts
• Real estate
• Investments
• Vehicles
• Antiques, art, jewelry, or other collectibles
Interest Rate Comparison: Secured vs Unsecured
As mentioned above, secured loans may have lower interest rates than unsecured loans since there’s less risk to the lender.
In terms of specifics, in April 2025, rates looked like:
• 12.43% average rate for unsecured loans
• A range of 6.49 to 12.99%, depending on such factors as the lender’s guidelines, the borrower’s credit score, and the loan amount.
Recommended: How to Get Approved for a Personal Loan
The Takeaway
The main difference between unsecured and secured personal loans is that one requires collateral — a secured personal loan — and the other doesn’t — an unsecured personal loan. Deciding between the two depends on the borrower’s willingness to risk the loss of collateral, as well as their overall creditworthiness and the rates they qualify for.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.
FAQ
Which is better: a secured or unsecured personal loan?
There is no one answer to whether a secured or unsecured personal loan is better. For some, an unsecured loan is the faster, simpler option without risk of losing one’s collateral. For others, a secured loan can be a path to a lower interest rate and more affordable loan.
Can I get a secured personal loan with bad credit?
Yes, you can often get a secured personal loan with bad credit, though the interest rate may not be favorable. However, the presence of collateral can reassure lenders and give you options that you might not otherwise have if you were shopping for an unsecured personal loan.
What happens if I default on a secured personal loan?
If you default on a secured loan, you risk losing your collateral. The lender could claim it and sell it to cover the loss of repayment money from you.
Do secured loans have lower interest rates than unsecured loans?
Often, secured loans have lower interest rates than unsecured loans. The reason: Because collateral is involved, the loan is less risky for the lender. The lender could claim the collateral if you default and use its value to cover the loan. This could motivate the lender to charge less in interest.
What can I use as collateral for a secured personal loan?
Some common examples of collateral for a secured personal loan include money in the bank, real estate, vehicles, investments, and collectibles (art, antiques, and jewelry, for instance).
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