What Is an Unsecured vs. Secured Personal Loan?
January 11, 2023
Personal loans are versatile loan products that can be used for a variety of reasons, from funding a major purchase to paying down high-interest debt. There are a few different types of personal loans, with two broad categories to consider: Unsecured personal loans and secured personal loans. But what do these terms really mean, and which might be the best fit for your needs?
What Is a Personal Loan?
A personal loan is a type of installment loan that can be used for any purpose. With a personal loan, you borrow a fixed amount of money upfront, then pay it off over time with consistent monthly payments.
What you use the loan for is your own choice. You might use it for a home renovation, a major purchase, or even to pay off other types of debt.
Certain types of personal loans may be designed for specific purposes. For instance, many personal loans are offered as a way to pay off high-interest debt. Others are general purpose loans and can be used for anything.
To get a personal loan, you must apply for one through a bank or lender. The lender will access your credit report to determine your creditworthiness. They use this data to decide if they’re willing to lend you money — and if so, what interest rate they will charge you.
Another factor that influences interest rates is whether or not the loan is secured or unsecured. Most are unsecured, but some lenders offer secured loans — potentially at lower interest rates.
What Is a Secured Personal Loan?
A secured personal loan is a loan that is backed by an asset that you own. You provide collateral — like a vehicle or an investment account (including any eligible stocks, bonds, exchange-traded funds (ETFs), or mutual funds that you may have in your portfolio) — when you get the loan. If you are unable to repay the loan, the lender can legally take possession of the collateral that you used.
Secured personal loans are not very common. However, some lenders offer them as a way to reduce the risk of lending money — and to be able to offer loans at lower interest rates.
Advantages to Secured Personal Loans
- May be offered at a lower interest rate compared to unsecured loans
- Generally easier to get approved for
Disadvantages to Secured Personal Loans
- Requires ownership of a substantial asset (vehicle, investments, real estate, etc.)
- If you default on the loan, the lender can take possession of the collateral you used
What Is an Unsecured Personal Loan?
An unsecured personal loan is a standard personal loan that is not “secured” by any asset.
When you apply for an unsecured loan, your approval odds are based only on your credit history. The lender will access your credit report and determine how likely you are to be able to repay the loan, based on your credit history.
If you end up being unable to repay an unsecured loan, the lender can send your debt to collections, assess penalty fees, and more — but they can’t seize control of your assets.
Advantages to Unsecured Personal Loans
- Doesn’t require collateral
- No risk of losing an asset if you can’t repay the loan
- Widely available from a variety of banks and lenders
Disadvantages to Unsecured Personal Loans
- Harder to get approved for (requires a higher credit rating)
- Interest rates may be higher
Unsecured vs. Secured Personal Loans Compared
If you’re trying to decide between a secured and an unsecured loan, it’s wise to first consider these factors:
Availability: In general, unsecured loans are more widely available from standard banks, credit unions, and online lenders. Secured loans are less common.
Collateral requirements: A secured loan requires that you have a valuable asset to put up as collateral. This could be a vehicle, equity in your home, or the value of your investment accounts. Unsecured loans do not require any sort of collateral.
Interest rates: Generally speaking, interest rates on secured loans will be lower than unsecured loans. This is because secured loans are less risky for the lender, so they are often willing to loan money at a lower interest rate.
Risk: To the borrower, the risk of a secured loan can be considered higher than with an unsecured loan. If you fail to repay a secured loan, you can damage your credit and lose the asset you put up as collateral. If you fail to repay an unsecured loan, your credit will be damaged — but you won’t lose your assets.
Ultimately, there’s no clear “best” type of personal loan. It all depends on your specific needs, credit rating, and other factors.
In any case, it pays to shop around. If you have good credit, it’s a good idea to check to see if you can prequalify for an unsecured personal loan, which will allow you to see your estimated interest rate and monthly payments without affecting your credit.
A Loan to Help You Reclaim Control of Your Finances
Secured loans are backed by an asset you own, while unsecured loans are solely based on your personal credit. The majority of personal loans are unsecured.
If you’re taking out a personal loan to pay off credit card debt, consider The PayOff Loan™ from Happy Money.
The PayOff Loan is an unsecured personal loan that’s designed to help borrowers consolidate high-interest credit card debt into a lower-interest personal loan. It can help qualified borrowers save money on interest, simplify monthly payments, and boost their credit score.
For more insights on personal finance, credit, and debt, check out the Happy Money blog.