Secured Vs. Unsecured Personal Loans: Which Is Better?
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It might sound strange, but I love researching personal finances. (Especially now that inflation news has completely taken over my feed.) Recently I’ve been looking into borrowing money and finding lots of fascinating information about debt. One of these interesting subjects is the types of personal loans available — specifically secured personal loans vs. unsecured personal loans. I’ll cover both below, including which type of loan I think is better.
In this article
What is the difference between a secured loan and an unsecured loan?
The key difference between secured debt and unsecured debt is pretty simple: secured debt requires collateral, and unsecured debt does not. Collateral means you promise (on the paperwork) that if you don’t pay the loan, the bank has the right to take something from you — like a car (auto loans) or a home (mortgages).
Secured debt is generally safer for the lender, so it is easier to get. Unsecured debt doesn’t involve collateral, so the bank usually needs to do a little more background research to determine if you are eligible to borrow. It involves more risk for the bank since there isn’t anything promised to them in the case the borrower doesn’t repay the loan.
Use Quicken Loans to Get a Personal Loan
- If you're tight on cash right now, you may want to consider getting a personal loan. A personal loan is a loan that you can use for just about any purpose like: paying off other debt, renovating your home, or family needs like a wedding or adoption.
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How do secured loans work?
If you are looking for a large amount of cash quickly, a secured personal loan is your best bet. You can access large amounts of money with less rigorous requirements than an unsecured personal loan. And this money can be used for everything from home improvements to purchasing a large piece of machinery to taking care of a personal life crisis.
Lenders are far more ready to hand out money with a secured personal loan because they are taking less risk. They have an item of comparable value that they can repossess in case you don’t follow through on your promise to repay the loan. Of course, this also means that you are taking a higher risk because you could lose something as essential to your daily life as your home or car.
The loan options available with secured loans include home equity loans or a home equity line of credit (HELOC), car loans, mortgages, and personal loans secured by savings accounts, investments, or even insurance policies. There are even secured credit cards, which involve committing a certain amount of money as collateral to receive a line of credit. If you are looking to improve your credit score, this can be a good option.
Banks will allow higher borrowing limits with secured personal debt, as well as lower interest rates, longer repayment terms, and, as a result, lower monthly payments.
How do unsecured loans work?
Unsecured loans are riskier for the lender because they don’t require collateral. If you don’t repay the loan, the lender has nothing to take from you. This doesn’t mean they won’t try to collect the funds, but there is nothing they can legally claim as theirs.
This means that the loans will have higher interest rates (usually 6% to 36% APR), the repayment terms will usually be shorter (often somewhere between two and seven years), and the loan amount may be lower. But if you shop around you can often find some good deals — loans with lower rates and better terms.
An unsecured loan can be used for almost anything — from debt consolidation to a business need to school bills and medical bills. Common examples of unsecured loan options are unsecured personal loans, personal lines of credit, credit cards, or student loans.
The qualifying process for unsecured debt is usually simpler than for secured debt, although the requirements are often stricter, e.g. they may require a higher credit score and better borrowing history. This is because there is no need for an appraisal since there is no collateral involved. Many lenders will even allow you to apply for a loan and receive a decision entirely online.
Some steps to get an unsecured loan include the following:
- Check your credit report — make sure your credit history meets the qualifications of the lenders you are looking into.
- Evaluate your budget — check your income and expenses and make sure the payment amounts will fit into your financial situation.
- Shop around to find lenders that are offering good deals — and go through their prequalification process.
- Gather the documentation required to qualify for the lender you want, which will likely include tax returns, W-2s, 1099s, and other income documentation.
- Finally, submit a formal application to the lender and wait for their response.
Related: What Can I Pawn to Make Money?
Banks offering secured and unsecured loans
Numerous banks offer secured and unsecured loans, and many have great deals. Do some research and you will find some good offers for both types of loans. Here are a few that I think have good options for both.
Loan Provider | Secured Loans | Unsecured Loans |
Best Egg | Online lender, good credit required, low APR, long/flexible repayment terms | Online lender, up to $50,000, low APR, long/flexible repayment terms |
First Tech Federal Credit Union | Very low interest rates, no fees, uses (specific) business stock as collateral, very high loan amounts, optional payment protection plan | Very low interest rates (5.7%), up to $50,000, two to seven-year repayment plans, online application, no fees, optional payment protection plan |
Upgrade | Online application, moderate credit necessary, no prepayment penalties, may use vehicle as collateral | Online application, low fixed rates, up to $50,000, no prepayment fees, one-day funding |
Use Quicken Loans to Get a Personal Loan
- If you're tight on cash right now, you may want to consider getting a personal loan. A personal loan is a loan that you can use for just about any purpose like: paying off other debt, renovating your home, or family needs like a wedding or adoption.
- TrustPilot Rating 4.6 out of 5
- Connect with lenders for $0
- 100% online experience.
Costs and fees
Costs and fees of secured loans
Secured loans have some fees that are not associated with unsecured loans. These include a fee at the start of the agreement and a valuation fee to estimate the value of the collateral. These fees are usually included as part of the loan cost and are paid upfront by the borrower.
Costs and fees of unsecured loans
Unsecured loans also include a few fees that may not be included with a secured loan. These depend on the lender but may include an application fee, an origination fee (1% to 6% of the loan value), a prepayment penalty (2% to 5%), and payment protection insurance (1%).
Related: What Are Installment Loans?
Pros and cons of secured loans
Pros
- Lower interest rates.
- An easier qualification process.
- Tax-deductible interest payments (on secured loans like mortgages).
Cons
- If you default, you may lose something essential to your daily life such as your house, vehicle, savings account, business machinery, or something else you promised as collateral.
- It can be more difficult to use the funds for whatever you want since the funding is usually tied directly to use for your promised collateral.
- For example, a HELOC is usually only allowed to be used for the home you are using as collateral. Or a mortgage can only be used to purchase a home.
Pros and cons of unsecured loans
Pros
- You don’t need to own a valuable asset to use as collateral.
- The lender cannot take a valuable asset from you (because there is no collateral).
- Unsecured loans can be used for almost any purpose.
- The application process is usually simpler because there is no appraisal.
Cons
- The loans generally come with higher APR and shorter repayment terms because of the higher risk for the lender.
- The requirements to receive the loan, such as creditworthiness, are usually tighter because of the higher risk.
- Missed payments are reported swiftly to each credit union, having a faster impact on your credit score.
- Defaulting will cause the lender to put the debt in collections, which can result in harassment, wage garnishment, and legal action.
Use Quicken Loans to Get a Personal Loan
- If you're tight on cash right now, you may want to consider getting a personal loan. A personal loan is a loan that you can use for just about any purpose like: paying off other debt, renovating your home, or family needs like a wedding or adoption.
- TrustPilot Rating 4.6 out of 5
- Connect with lenders for $0
- 100% online experience.
The bottom line
Which one is better, secured debt or unsecured debt? It may be a cliché, but the answer comes down to what you want to do with the money. They both have their advantages and disadvantages.
An unsecured loan is for you if you want to get money quickly, want flexibility with the money, want to take less risk when taking out a loan, want a simpler process for getting the money, have a good credit history and are okay with higher loan rates and shorter repayment terms.
But if you want a lower interest rate, lower monthly payments, a longer repayment term, tax deductions, and a less restrictive qualification process, then a secured loan is your best option.
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Writer
A veteran wordsmith and research nerd, Brittany Wren spent a decade working in higher education where she helped people overcome challenges to chart a path forward. These days, she writes about personal finance, careers, parenting and education. Her content has been published by a wide variety of brands including T-Mobile, Intuit, LifeLock, Reliant Fund Administration and CURO Financial Technologies Corp.
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