Secured vs. Unsecured Personal Loans: Which Is Right for You?

secured and unsecured personal loans

A personal loan is a type of installment loan where you borrow a fixed amount and repay it in regular installments over a set term. Personal loans come in two main forms: secured and unsecured. The key distinction lies in whether you need to pledge an asset as collateral.

A secured personal loan is backed by collateral—an asset you own, such as a vehicle, savings account, or certificate of deposit. If you default, the lender can take that asset to recover the money. An unsecured personal loan does not require collateral; the lender approves you based on your creditworthiness and income, and there is no specific asset tied to the loan.

Many bank-issued personal loans are unsecured, but secured options are available from various lenders, including credit unions and online lenders. Understanding the trade-offs between the two can help you decide which type fits your financial situation.

Sources: Consumer Financial Protection Bureau, PNC, Freedom Credit Union, Investopedia

Key Differences at a Glance

The table below compares secured and unsecured personal loans across the most important factors for borrowers. Keep in mind that specific terms vary by lender and your individual credit profile.

Sources: Consumer Financial Protection Bureau, PNC, First Hope Bank, TransUnion, Bankrate, Experian, Discover, Investopedia

Role and collateral

Collateral is the defining feature of a secured loan. Common assets used as collateral for secured personal loans include savings accounts, certificates of deposit, vehicles, and real estate. By pledging an asset, you reduce the lender’s risk, which is why secured loans often come with lower interest rates and more favorable terms.

However, collateral creates a significant risk: if you fail to make payments, the lender can seize the asset. This can mean losing your car or your home, depending on what you pledged. In contrast, an unsecured loan does not put a specific asset on the line, but defaulting can still lead to lawsuits, wage garnishment, and serious damage to your credit score.

Before choosing a secured loan, carefully consider the worst-case scenario. If you’re confident in your ability to repay, the lower rates and larger amounts can be attractive. If you prefer not to risk a valuable asset, an unsecured loan may be more appropriate, even with higher rates.

• Typical collateral: savings accounts, CDs, vehicles, real estate.
• Default on a secured loan: potential loss of collateral.
• Default on an unsecured loan: legal action, credit score damage, but no direct asset seizure.

Sources: PNC, Freedom Credit Union, TransUnion, Experian, Discover, Investopedia

Interest Rates and Loan Amounts

Interest rates are often the first thing borrowers compare. Because secured loans carry less risk for the lender, they generally offer lower interest rates than unsecured loans. For example, the average interest rate on a 24-month unsecured personal loan was around 12.17% as of August 2023, according to Federal Reserve data cited by TransUnion. Secured loan rates are typically lower, though the exact rate depends on market conditions, the lender, and your creditworthiness.

Loan amounts also differ. Secured loans can be larger because they are backed by assets—some lenders may allow you to borrow up to the value of the collateral. Unsecured loans usually have lower maximums, but many lenders offer amounts up to $100,000 for well-qualified borrowers.

When you compare offers, look beyond the interest rate. Consider the annual percentage rate (APR), which includes fees and gives a fuller picture of the loan’s cost. Also, review the repayment term—personal loan terms often range from 12 to 60 months, and some lenders offer longer terms up to 84 months.

Sources: PNC, TransUnion, Bankrate, Discover, Freedom Credit Union, First Hope Bank

Credit Score Requirements and Approval Speed

Your credit score plays a major role in loan approval, but the requirement differs between secured and unsecured loans. Unsecured loans typically require good to excellent credit because the lender has no collateral to fall back on if you default. Secured loans, on the other hand, may be easier to obtain if your credit score is lower, since the collateral reduces the lender’s risk.

Approval speed also varies. Unsecured loans are often approved quickly—sometimes within a day—because there is no asset to appraise. Secured loans may take longer because the lender must evaluate the value of the collateral, which adds time to the underwriting process.

If you have a limited credit history or a lower score, a secured loan could be a more accessible path, but weigh the risk of losing your asset. If you have strong credit, an unsecured loan can offer fast approval without putting your property on the line.

Sources: First Hope Bank, TransUnion, Bankrate, Experian

How Each Type Affects Your Credit

Both secured and unsecured personal loans are reported to the three major credit bureaus. This means that making on-time payments can help you build a positive credit history, while missed payments can damage your credit score.

The primary difference in credit impact comes from the risk of default. With a secured loan, defaulting may cause you to lose your collateral, which can have lasting financial consequences beyond credit damage. With an unsecured loan, defaulting does not involve asset seizure, but the lender may sue you, and the resulting judgment can appear on your credit report.

In either case, consistent, on-time payments are the best way to protect and improve your credit. Before you borrow, make sure the monthly payment fits comfortably within your budget.

Sources: Freedom Credit Union, TransUnion

Typical Uses and Flexibility

Personal loans can be used for a wide range of purposes, from consolidating debt to covering unexpected expenses. The main difference in flexibility is that unsecured loans generally have fewer restrictions on how you use the funds. Secured loans may come with conditions, especially if the collateral is tied to a specific purpose, such as a car loan or home equity loan.

That said, many secured personal loans are still flexible and can be used for general purposes. It’s important to read the loan agreement carefully to understand any usage restrictions.

Your choice between secured and unsecured should be guided by your financial goals, your ability to provide collateral, and your comfort with risk. If you have valuable assets and need a larger amount at a lower rate, a secured loan might be worth considering. If you prefer not to risk your property and have good credit, an unsecured loan is likely the simpler route.

Sources: Bankrate, Investopedia

Making Your Decision

The right choice depends on your personal situation. To help you decide, consider the following criteria:

If you have a valuable asset you’re willing to pledge, a secured loan could offer lower rates and a larger amount, but you must be prepared for the possibility of losing that asset if you default.

If you have good or excellent credit and prefer not to risk collateral, an unsecured loan may be easier to obtain quickly, even though rates are typically higher.

Think about your repayment ability, how quickly you need funds, and what you’re comfortable risking. No single loan type is universally better—it all comes down to your unique circumstances.

• Assess your credit score: strong credit favors unsecured loans; lower credit may make secured loans more accessible.
• Consider your need for speed: unsecured loans are often faster.
• Evaluate your risk tolerance: are you willing to risk an asset to get a lower rate?
• Compare full loan offers, including APR, fees, terms, and monthly payments.

Sources: PNC, First Hope Bank, Bankrate, Discover