Secured vs. unsecured personal loans: What to know

The main difference between a secured and an unsecured loan, is that one requires collateral. Collateral is a valuable asset, such as your home or your car, that “secures” the loan. Secured loans are safer for lenders since they can seize the collateral if you stop making payments and use it to recoup their losses. As a result, secured loans tend to have lower interest rates and be easier to qualify for. 

However, they can take longer to get — like if the collateral needs to be appraised — and some can only be used for specific purposes, like buying a home or a car.

Secured and unsecured loan differences

What are secured loans?

Secured loans require collateral, like a home, vehicle, or savings account, and are often, but not always, a type of installment loan. The addition of collateral frequently translates to a lower interest rate, but the collateral can be taken in the event you default on the loan. In cases where the collateral needs to be appraised, like with a mortgage or home equity loan, it can take a month or more to close the loan. Some of the most popular types of secured loans include:

• Mortgages: An installment loan you use to purchase a home that’s secured by the home itself. Loan terms often range from 15 to 30 years. Mortgage rates can be fixed or adjustable (variable), depending on the mortgage type.
• Auto loans: An installment loan you use to purchase a vehicle that’s secured by the vehicle itself. Repayment periods may last up to seven years.
• Home equity loans: A home equity loan is a type of secured installment loan that is backed by a portion of the equity you have in your home. You may be able to borrow up to 85% of your home’s equity, depending on the lender. Home equity loans can be used for any legal purpose, and repayment terms range from five to 30 years. 
• Home equity lines of credit (HELOCs): A revolving credit line, backed by a percentage of the equity you have in your home, that can be used for any legal purpose. HELOCs typically have a draw period, during which you can access the credit line, and a repayment period, during which you pay off what you borrowed. Each may last up to 10 and 20 years, respectively.
• Secured credit cards: A credit card that requires a deposit upfront, often in the amount of the credit line you’ll receive.
• Secured personal loans: A personal loan may be backed by a variety of assets such as a CD or bank account, and can be used for a variety of personal expenses.

Good to know: The average APR on a 72-month new car loan was 8.67% in November 2023, according to the Federal Reserve.

What happens if you default on a secured loan?

With secured loans, lenders have direct recourse if you don’t pay a loan as agreed. They don’t need to sue you and win a judgment before they can begin to recover their losses. That means your asset can be seized in the event of a default, but it can also mean larger available loan amounts, lower APRs, and more flexible eligibility requirements.

What are unsecured loans?

Unsecured loans are loans that don’t require collateral. Approval is based primarily on your income, credit score, debt, and credit history — not on the value of any assets you own. Some common types of unsecured loans include:

• Personal loans: An installment loan with a fixed interest rate (typically) where the lender provides you with a lump sum amount upfront. The loan is repaid with interest over a set term, such as 2 to 7 years. (Home improvement, boat, and RV loans may have longer repayment terms.) Personal loans can be used for nearly any legal purpose, depending on the lender, except for higher education expenses and often business expenses. Personal loan amounts tend to range from $600 to $50,000, though some lenders offer $100,000 personal loans (and larger) to well-qualified applicants.
• Student loans: An installment loan where the lender provides a lump sum amount to cover higher education expenses. Monies typically go directly to your school, but any excess may be paid to you. You repay the loan, plus interest and fees, over a set term. Most student loans provide a period of in-school deferment, during which payments are not required.
• Credit cards: A revolving credit line, in the form of a card, that you can use up to your credit limit, repay, and use again. If you don’t repay the balance in full each billing cycle, you’re charged interest on the outstanding amount according to the card’s APR. Notably, you may be charged interest on unpaid interest from previous months, which can lead to a rapid accumulation of credit card debt.
• Personal lines of credit: A revolving credit line that you can use, pay off, and use again during the draw period. Interest is charged during the draw period on outstanding amounts and monthly minimum payments are due. Once the draw period ends, you can pay off the balance in full or may be able to refinance it using a term loan.

Good to know: Personal loan interest rates data from Credible puts averages for three- and five-year loans at 14.02%, and 22.15%, respectively.

What happens if you default on an unsecured loan? 

If you default on an unsecured loan, your lender can make repeated attempts to collect the debt and can sell the debt to a third-party collections agency. Further, your lender or a collection agency can sue you to try and get a judgment. If successful, they can force you to pay through tactics like wage or bank garnishment.

How to get an unsecured loan

Interested in getting an unsecured loan? Follow these steps:

1. Check your credit: Approval is largely based on your credit, so check where yours stands and make sure everything is correct. You can get free copies of your credit reports from AnnualCreditReports.com, and can often check your credit scores for free through various credit card providers, banks, and financial service companies.
2. Consider your loan options: There are many types of unsecured loans on the market. To figure out which is best, consider why you want the loan, how much you need, and how you want to use it. For example, if you want to make a large one-off purchase, a personal loan is likely best. However, if you want to build credit by making small purchases on an ongoing basis, a credit card may make more sense.
3. Shop around and compare loans: Shop around and compare lenders. Each lender has its own eligibility and underwriting requirements, and loan features may differ. APRs, loan amounts, terms, and times to fund often vary between lenders. As do minimum credit score and income requirements, and permissible loan purposes. Find a lender you’re likely to qualify with that offers the loan you need.
4. Prequalify: Before applying, prequalify with multiple lenders to see rates and terms you might be eligible for. Prequalifying won’t impact your credit score, but rates aren’t an offer of credit. When filling out the prequalification form, you may be asked to provide your Social Security number and other personal information so the lender can better customize rate estimates.
5. Apply: Once you submit a formal application, the lender will perform a hard credit pull, which may temporarily hurt your score. The lender may also require you to send over documents to prove your identity, income, residence, and employment such as a government-issued ID, pay stubs, or bank statements.
6. Sign: Upon approval, review the loan agreement and e-sign if it looks good. Once signed and submitted, the lender can get to work on funding your loan.
7. Get your funds: Once the contract is signed, you can expect to get your funds as soon as the same or next business day, in many cases. Though some lenders may take up to a week.

Compare personal loan interest rates

How to get a secured loan

If you’re interested in getting a secured loan, the steps are similar to those listed above. You’ll want to check your credit, decide which type of secured loan you want, shop around, prequalify if possible, and apply for the best fit. But the process may take longer — especially if you’re applying for a mortgage, home equity loan, or HELOC — since your collateral will need to be appraised.

But choosing the right type of secured loan is often easy. For example, if you want to buy a home, you’ll want a mortgage. If you want to buy a car, you’ll want an auto loan (unless it’s an older car that doesn’t qualify, then an unsecured personal loan could work). But if you want to use the funds for a variety of different expenses, you’ll want to consider a secured personal loan or perhaps a home equity loan.

The best credit product will depend on factors like the amount you want to borrow, the assets you have available to pledge, and what you can get approved for.

Secured vs unsecured loan FAQ

What is better: a secured or unsecured loan?

Both loan types have their benefits. Unsecured loans offer an easier, quicker application process and don’t require the assessment of collateral but can be harder to get. Secured loans often have a higher likelihood of approval, higher available loan amounts, and lower APRs but require you to pledge collateral that can be seized if you default.

Do unsecured loans hurt your credit?

Like any type of credit account, unsecured loans can hurt your credit, especially if you miss or make late payments. And applying for any new loan can ding your credit score. But they can also help your credit if you make payments on time. Plus, they can improve the diversity of your credit mix, and even lower your credit utilization ratio if used to consolidate credit card debt.

Do secured or unsecured loans have higher APRs?

Secured loans often have lower APRs than unsecured loans because the collateral reduces the amount of risk a lender faces. For example, the average interest on a five-year auto loan is 8.15%, compared to 12.35% on a two-year personal loan, according to the Federal Reserve. However, some lenders offer low APRs on unsecured personal loans for well-qualified borrowers.