What Is a Secured Loan?
A secured loan is a type of loan that is backed by collateral, which is a valuable asset the borrower owns, such as a home, car, or savings account. The lender can take possession of that collateral if the borrower defaults on the loan, making the loan less risky for the lender.
Because secured loans are backed by collateral, they often come with lower interest rates and larger borrowing limits compared with unsecured loans. They may also be easier to qualify for if you have a lower credit score, since the collateral reduces the lender's risk.
- Common types of secured loans include mortgages, auto loans, home equity loans, and secured personal loans.
- Examples of collateral: a vehicle, real estate, cash in a savings account, certificates of deposit, or stocks and bonds.
- If you default on a secured loan, you risk losing the collateral in addition to facing negative credit consequences.
Sources: Federal Deposit Insurance Corporation, Bankrate, OneMain Financial, TransUnion
What Is an Unsecured Loan?
An unsecured loan does not require collateral. Instead, the lender approves the loan based on your creditworthiness, income, and other financial factors. If you default on an unsecured loan, the lender cannot automatically take your property; however, the lender may report late payments to credit bureaus, engage in debt collection, or sue you to recover the debt.
Because unsecured loans are riskier for lenders, they usually come with higher interest rates and lower borrowing limits than secured loans. They also generally require good to excellent credit to qualify.
Common examples of unsecured loans include credit cards, most personal loans, and student loans.
Sources: Federal Deposit Insurance Corporation, Credible, OneMain Financial, TransUnion
Key Differences: Collateral, Risk, and Rates
The table below summarizes the key differences between secured and unsecured loans, based on information from the FDIC, Bankrate, OneMain Financial, and TransUnion. These comparisons are general; specific terms vary by lender and your individual circumstances.
| Feature | Secured Loan | Unsecured Loan |
|---|---|---|
| Collateral required | Yes | No |
| Interest rate | Generally lower | Generally higher |
| Borrowing limit | Generally higher | Generally lower |
| Qualification difficulty | May be easier to qualify, especially with lower credit score | May require higher credit score and stable income |
| Risk to borrower | Potential loss of collateral if default | No risk of losing collateral, but potential negative credit impact if default |
| Common types | Mortgages, auto loans, secured personal loans | Credit cards, most personal loans, student loans |
Sources: Federal Deposit Insurance Corporation, Bankrate, OneMain Financial, TransUnion
Secured vs. Unsecured in Personal Loans
Personal loans can be either secured or unsecured. Unsecured personal loans are the standard option among personal loan lenders; they are based on your credit and income, not on collateral.
However, some lenders offer secured personal loans that require you to pledge an asset, such as a car or a savings account. A secured personal loan may offer a lower interest rate and a higher borrowing limit compared with an unsecured one, and it may be easier to qualify for if you have a lower credit score.
Sources: Bankrate, OneMain Financial
Are Student Loans Secured or Unsecured?
Most student loans are unsecured. This includes federal student loans and most private student loans. Federal student loans are always unsecured and generally do not require a credit check or collateral. Private student loans are typically unsecured as well, but lenders may use other risk mitigations, such as requiring a credit check or a cosigner.
Because student loans are not secured by collateral, the lender's recourse in the event of default is limited to actions such as reporting the default to credit bureaus, sending the debt to collections, or pursuing legal action. Federal student loans, however, offer unique protections, including income-driven repayment plans and forgiveness options that are not typically available with private student loans.
Sources: Student Loan Professor, SoFi
Pros and Cons
Secured loans can offer lower interest rates, larger loan amounts, and easier qualification, especially if your credit isn't perfect. The main drawback is that you risk losing your collateral—such as your car or home—if you fail to make payments.
Unsecured loans carry more risk for the lender, which often results in higher interest rates and lower borrowing limits. You typically need good or excellent credit to qualify. However, you don't have to put any of your property at risk beyond the debt itself, although default can still damage your credit and lead to collection actions or a lawsuit.
- Secured loan pros: lower rates, higher limits, more accessible for lower credit scores.
- Secured loan cons: risk of losing collateral if you default.
- Unsecured loan pros: no property at risk.
- Unsecured loan cons: higher rates, lower limits, stricter credit requirements.
Sources: Federal Deposit Insurance Corporation, Bankrate, OneMain Financial, TransUnion
How to Choose the Right Type
When deciding between a secured and an unsecured loan, consider what you need the money for, how much you need to borrow, and the level of risk you are comfortable taking.
If you have a valuable asset you're willing to pledge and you want a lower interest rate or a larger amount, a secured loan might be appropriate. But you must be confident you can make the payments, because defaulting could mean losing that asset.
If you prefer not to put an asset on the line and you have good credit, an unsecured personal loan or a student loan might be the better fit. Remember that unsecured loans usually come with higher rates and stricter approval requirements.
Before you apply, compare offers from multiple lenders and consider using a loan calculator to estimate what your monthly payment would be based on the loan amount and interest rate.
Sources: Bankrate, OneMain Financial, TransUnion
Side-by-Side Category Comparison and Decision Criteria
The table below outlines the typical categories of secured and unsecured loans and the decision criteria that can help you choose the right type for your situation. The criteria are general; your specific qualifications will depend on your credit, income, and lender policies.
| Category | Secured Loan Consideration | Unsecured Loan Consideration |
|---|---|---|
| Collateral | You need to provide an asset as collateral. | No collateral is needed. |
| Interest rate | Rates are typically lower because the loan is less risky for the lender. | Rates are typically higher you need to qualify with your credit and income. |
| Loan amount | You may be able to borrow a larger amount, based on the value of your collateral. | Borrowing limits are generally lower. |
| Qualification | May be easier to qualify, even with a lower credit score. | You usually need good or excellent credit and a stable income. |
| Risk appetite | You are comfortable risking an asset if you can't repay. | You want to avoid putting assets at stake. |
| Use of funds | Often used for large purchases like a home or car, or to consolidate debt. | Common for smaller needs like emergency expenses, or for education (student loans). |
Sources: Federal Deposit Insurance Corporation, Bankrate, OneMain Financial, TransUnion
Frequently asked questions
What is collateral?
Collateral is a valuable asset that a borrower owns and offers to a lender to secure a loan. If the borrower fails to repay the loan, the lender can take the collateral to recover its losses. Examples of collateral include a home, a car, cash in a savings account, certificates of deposit, or stocks and bonds.
Sources: Federal Deposit Insurance Corporation, OneMain Financial, TransUnionWhat happens if I default on an unsecured loan?
If you default on an unsecured loan, the lender cannot automatically take your property. However, the lender may report the late payments to credit bureaus, which can lower your credit score, and may engage in debt collection or sue you to try to recover the money owed. The long-term consequences can include difficulty qualifying for future credit.
Sources: Federal Deposit Insurance Corporation, TransUnionCan I get a secured personal loan?
Yes, some lenders offer secured personal loans that require collateral, such as a car or a savings account. These loans may offer lower interest rates and higher borrowing limits than unsecured personal loans, and they may be easier to qualify for if you have a lower credit score. However, you risk losing the collateral if you default.
Sources: Bankrate, OneMain FinancialSources
- Loans | FDIC.gov — Federal Deposit Insurance Corporation
- Secured vs. Unsecured Loans: Understanding the Differences — Credible
- Secured vs. Unsecured Personal Loans: Key Differences — Bankrate
- Secured vs. Unsecured Loan: What’s the Difference? — OneMain Financial
- Unsecured vs. Secured Loan: Understanding the Difference — TransUnion
- Is a Student Loan Secured or Unsecured? A Simple Guide — Student Loan Professor
- Is a Student Loan Secured or Unsecured Debt? — SoFi