When it comes to borrowing money, the type of loan you take out matters. There’s a big difference between secured and unsecured loans, and which one you should get comes down to your needs, creditworthiness, and if you can afford to put up collateral.
- Secured loans are a type of loan backed by collateral, which means that if you don’t make payments, your lender can seize that asset.
- Mortgages and auto loans are types of secured loans.
- Unsecured loans don’t require collateral, so getting one could mean a higher interest rate and credit requirements.
Secured vs. Unsecured Loans: Overview
Both secured and unsecured loans come from a variety of different banks, credit unions, and online lenders. Because of this, there are different eligibility requirements that you may need to meet before qualifying for either a secured or unsecured loan.
The main difference between a secured and unsecured loan is collateral. A secured loan requires you to put up an asset or property that the lender can seize if you default on your loan. An unsecured loan doesn’t require collateral.
A secured loan is a type of loan that requires collateral, such as a home or car, to act as security for repayment. This means that if you fail to make payments on your loan, your lender can seize your collateral. In some cases, secured loans can use money in an account, like a savings account or certificate of deposit (CD), as collateral.
Types of Secured Loans
There are a few different types of secured loans, including:
- Mortgages and home loans
- Home equity loan or home equity line of credit (HELOC)
- Auto loans
- RV, boat, and motorcycle loans
- Car title loans
- Secured lines of credit and credit cards
- Share-secured or savings-secured loans
Secured Loan Pros
- Potentially lower interest rate. In general, interest rates for secured loans are lower than those of unsecured loans because if you fall behind on payments, lenders can seize the property you used to secure the loan.
- Lower barriers to qualify. If you don’t have good or excellent credit, it’s easier to qualify for a secured loan because the lender is more likely to take a chance on you due to the safety net provided by the collateral.
- Bigger borrowing limits. In most cases, you can borrow more money with a secured loan compared to an unsecured loan.
- Lower repayment periods. For secured loans like mortgages or home equity loans, you can get longer repayment periods than unsecured loans.
Secured Loan Cons
- You could lose your property. Whether you’re putting up your home, car, or even savings account as collateral, there’s a chance you could lose it. If you fail to repay your loan and end up in default, your lender could seize your assets.
- Usually tied to a specific asset. Most secured loans are tied to a specific piece of property or asset, which you must have to take out the loan. For instance, you can’t take out a mortgage without putting up your home as collateral. Likewise, you can’t take out an auto loan without using your car as collateral.
An unsecured loan is a type of loan that doesn’t have any particular asset, property, or collateral tied to it. Qualification is based on your creditworthiness as well as other requirements, which could be stricter compared to those of a secured loan.
Unsecured Loan Pros
- Less risky. Since unsecured loans aren’t tied to collateral, you aren’t at risk of losing your property if you fail to repay your loan.
- Quick application. Unsecured loans often have an easy application and approval process. Many personal loan lenders let you check if you’re eligible through pre-qualification.
- Good option for most needs. If you need to pay for something that isn’t covered by a specific loan type, an unsecured personal loan could be helpful. An emergency, car repair, upcoming wedding, adoption, or something else may necessitate securing funding quickly.
Unsecured Loan Cons
- Harder to qualify. Getting an unsecured loan is usually tied to your credit score and history. So if you have bad credit, you may not qualify for the best loan options available.
- Higher interest rates. Since eligibility is tied to primarily to your creditworthiness, your interest rates would be based on your credit score, how much you want to borrow, repayment terms, and your income. The higher your credit score, the lower your interest rate.
Which Type of Personal Loan Is Best for You?
A secured loan might be a good idea if:
- You’re buying property, like a home, car, etc.
- You don’t have sufficient credit to qualify for an unsecured loan with the lowest interest rate.
- You’re taking out a large amount of debt that you need to repay over a long period of time, as with a mortgage or home equity loan.
An unsecured loan might be a better fit if:
- You want to consolidate debt through a personal loan.
- You don’t need to borrow very much or you have multiple uses for the funding in mind.
- You’re taking out student loans to pay for school.
Does a Secured Loan Affect Your Credit Score?
Anytime you take out a loan—secured or unsecured—lenders conduct a hard credit check. This causes your credit score to temporarily dip, but it usually rebounds after a few months of on-time payments.
What Credit Score Do You Need for a Secured Loan?
The credit score you need for a secured loan depends on the type of loan you’re applying for as well as your lender. There is no set standard for what you need to have when it comes to secured loans.
What Builds Credit Faster, a Secured or Unsecured Loan?
Both secured and unsecured loans will help you build your credit score, as long as you make at least the minimum payment every month.
The Bottom Line
When it comes to borrowing money, the type of loan you take out matters. There are some substantial differences when it comes to secured vs. unsecured loans. Make sure you compare lenders and offers to see which one would best suit your needs.