Secured vs unsecured loans: What’s the difference?

Can’t decide between a secured vs unsecured loan? Secured loans require collateral whereas unsecured loans don’t. Though both options can help you, whether a secured or unsecured loan is better depends on your situation and goals. 

To get the financing option that matches your needs, check out how secured and unsecured loans are different. 

How does a secured loan work?

A secured loan lets you borrow money from a lender provided that you put up some sort of collateral. Usually, you can use your house, car, savings account or certificate of deposit. The catch is the lender can repossess the asset if you fail to pay back the loan. 

Since the collateral offers a safety net for lenders, secured loans are easier to get approved for. Plus, they commonly have higher loan limits, lower interest rates and flexible terms. 

Examples of secured loans

There are different types of secured loans. The most common ones you may come across are:

• Secured personal loans: You can use any valuable asset, like a house or car, to guarantee your loan. Personal loans can be used to fund a range of expenses – from debt consolidation to vacations. 
• Car loans: A car loan helps you finance a vehicle, and the car often serves as the collateral.
• Mortgages: If you need to finance your home, taking out a mortgage secures the loan against the house. So, defaulting on the loan can lead to foreclosure of the property. 

Pros and cons of secured loans

Do you think secured loans are what you need? Make sure you weigh the benefits and risks before you choose.

Pros of secured loans

• Higher borrowing limits.  
• Features lower interest rates. 
• Easier to qualify for even if you have bad credit. 

Cons of secured loans

• You risk your assets if you default on the loan. 
• Depending on the type of loan, you may be restricted on where you can use the funds. 
• You need valuable collateral to qualify. 

How does an unsecured loan work?

With unsecured loans, there’s no collateral involved. Meaning, you won’t need to prove you own a valuable asset. Instead, lenders look at factors, like your credit score, payment history, income and employment, to assess your eligibility. 

Lenders take more risks with unsecured loans since they can’t reclaim any asset if you default. That said, unsecured loans usually require good credit and have tougher eligibility requirements. Depending on your financial capacity, lenders may hit you with higher interest rates and lower borrowing limits, too. 

Examples of unsecured loans

Here are some of the most common types of unsecured loans you may consider: 

• Unsecured personal loans: An unsecured personal loan can be used for almost anything – home projects, medical bills or even weddings. 
• Student loans: These loans are tailored specifically for education expenses. So, funds are limited to college-related costs, like tuition, fees and course material. 
• Credit cards: You can use credit cards to make smaller purchases. Unlike loans, you have a credit limit that you can use and pay down as needed. 

Pros and cons of unsecured loans

Before you decide, it’s worth noting the advantages and disadvantages of unsecured loans.

Pros of unsecured loans

• No collateral needed, so you won’t risk losing your asset if you default.
• Flexible use of funds based on the type of unsecured loan you take out.
• The application process and approval tend to be quicker.  

Cons of unsecured loans

• You need to meet stricter criteria to qualify.
• Interest rates tend to be higher especially if you have poor credit.
• Lower borrowing limits compared to secured loans.

What is the difference between secured and unsecured loans?

Here are the key differences between the two options:

	Secured loan	Unsecured loan
Collateral required?	Yes	No
Loan size	Higher loan amount	Lower loan amount
Interest rate	Lower interest rates	Higher interest rates especially for borrowers with less-than-stellar credit
Criteria	Easier to qualify for	Stricter requirements

What is better, a secured or unsecured loan?

Which loan is better depends on a range of factors, like your credit, financial situation and risk tolerance.  

When to choose a secured loan

Secured loans may be what you’re looking for if you need to borrow a higher amount to purchase a house or car. You can also go for a secured loan if your credit score or income is not enough to qualify for an unsecured debt. 

But before you apply for a secured loan, see to it that you can confidently afford the payments in the long run. This way, you won’t be in danger of losing your collateral in case things don’t go as planned. 

When to choose an unsecured loan

If you don’t have assets to pledge or don’t want to risk your assets, unsecured loans are the better option. Unsecured loans can also be a good fit if you’re only looking to borrow a small amount. 

While they tend to come with higher rates, you may land a competitive deal if you have strong credit and income. Unsecured loans can also be a great choice to access funds faster. 

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