Secured vs. Unsecured Personal Loans: Which One Is Right for You?
Written by
Caroline Banton
Edited by
Emily Gadd
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Secured and unsecured personal loans differ in terms of risk and cost to both the borrower and the lender. A secured loan, such as a home loan or car loan, is backed by collateral. An unsecured loan, such as a student loan or credit card, has no collateral.Â
Secured Loans vs. Unsecured Personal Loans
The interest rate and ease of approval for any type of loan will depend on the lender and your credit score and credit history.
The following table shows the basic differences between secured and unsecured personal loans.
| Secured Loan | Unsecured Loan | |
|---|---|---|
| Collateral Required | Yes | No |
| Preferred Credit Score | 640+ (Fair). Can depend on the lender. | 700+ (Good to Excellent). Can depend on the lender. |
| Loan Insurance | Sometimes Required | Not Usually Required |
| Risk | The asset used as collateral can be repossessed. Missed payments will also hurt your credit score. | There is no asset to repossess. Missed payments will hurt your credit score. |
| Examples | – Car loan – Mortgage – Home equity loan – Car title loan | – Credit card – Student loan – Personal loan (e.g. home improvement loan, small loan for vacation) |
Pros and Cons of Secured Loans
These are the main considerations for a secured loan:
Pros
- You can qualify with a lower credit score because it requires collateral.
- You can borrow larger amounts of money.
Cons
- If you default on payments, you could lost the asset you put up as collateral.
Pros and Cons of Unsecured Loans
If you want an unsecured loan, here’s what you need to consider:
Pros
- You won’t have to put up an asset as collateral.
Cons
- You will have to have a high credit score (very good to excellent).
- It can be difficult to borrow a lot of money.
When Should You Choose a Secured Loan?
Secured loans are best for people looking to borrow larger amounts of money. They are commonly used in purchasing large assets, like homes or cars.
However, you can also get a personal secured loan that is tied to a large asset. Secured personal loans are usually a better option for people with lower credit scores. The collateral makes them less risky for lenders.
When Should You Choose an Unsecured Loan?
Unsecured loans are better choices for people who have strong credit and don’t want to tie an asset to their loan. They can also be used for smaller purchases.
How to Qualify for a Secured vs. Unsecured Loan
The process for applying for a secured and unsecured loan will be pretty similar.Â
1. Check Your Credit Report and Score
It’s important to know what kind of loans you will qualify for before you start applying. Check your credit score to see if you qualify for loans with lower rates.
2. Determine How Much Money You Need
Lenders will want to know how much money you want to borrow. Plus, this can help you decide if you should get a secured or unsecured loan.
3. Compare Lenders
When you’re shopping for lenders, check interest rates and make sure you understand what their approval process looks like. Make sure you understand how much it will cost to pay back the loan with the interest you’re being charged.
4. Gather Your Documents
If you’re applying for a secured loan, the lender will probably ask for more information about your collateral. No matter what, they will probably want to check your credit history.Â
5. Apply for the Loan
Fill out and submit your application. Make sure you fill out all of the information correctly. The wrong information can delay your application being approved.
FAQ
- Which type of loan is better for bad credit?
- It is possible to get secured and unsecured loans with bad credit. However, the interest rates are likely to be better if you get a secured loan. This is because the collateral will make you less risky to the lender.
- Can you switch a secured loan to an unsecured loan?
- You can pay off the unsecured loan with the money from the secured loan.
- What happens if you default on a secured vs. unsecured loan?
- If you default on a secured loan, the collateral tied to it will be repossessed and your credit score will go down. If you default on an unsecured loan, nothing will be repossessed. However, your credit score will still go down.
- Do secured loans always have lower interest rates than unsecured loans?
- The terms of a loan will always be different depending on the lender, the amount of money you’re borrowing, current interest rates and your personal credit history.
